Hope and fear mark Yahoo at crossroads

SAN FRANCISCO Tue May 5, 2009 7:59am BST

A visitor walks past a Yahoo advertisement at the GSMA Mobile World Congress in Barcelona, February 18, 2009. REUTERS/Albert Gea

A visitor walks past a Yahoo advertisement at the GSMA Mobile World Congress in Barcelona, February 18, 2009.

Credit: Reuters/Albert Gea

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SAN FRANCISCO (Reuters) - Four months into her fix-it job at Yahoo, Chief Executive Carol Bartz has worked through an impressive checklist.

The 60-year-old executive has moved swiftly to rebuild the Internet company to her specifications, upending the organizational structure, replacing executives and cutting costs including 675 jobs, or 5 percent of the workforce.

Analysts say that is exactly the kind of shake-up needed at Yahoo, which has seen its sales growth slow and its market share overtaken by Google Inc (GOOG.O) in recent years.

For Yahoo's (YHOO.O) ranks, still shell-shocked from deep cuts in 2008 -- including 1,600 axed jobs -- the hope that Bartz brings is increasingly mixed with a dose of fear and uncertainty.

Yet broad support remains for Bartz despite the tough talk, canceled holiday parties and forced vacations that have come to define her era.

"We are all sort of wanting to believe in her because we really want to see Yahoo turned around," said one Yahoo insider who wished to remain anonymous for fear of retribution. "But it still doesn't make it any less scary when you don't hear about what's coming up."

With a new round of layoffs under way, and a steady stream of Yahoo sites getting axed, anxiety within the ranks has been exacerbated by what some say is a growing sense of secrecy.

Bartz' famous penchant for tight lips, which initially showed in her emphatic displeasure toward news leaks, is increasingly evident in other aspects of Yahoo's operations. The informal flow of information once common within the company has come to a halt. "Everything is on a need to know basis," the Yahoo source said.

Bartz has taken steps to keep employees in the loop with weekly emails about her activities and changes at the company. But the communiques don't always provide the full picture.

Decisions to shutter parts of the business such as GeoCities, which Yahoo acquired for more than $4 billion in 1999, have not been announced throughout the company. Some employees worry that their project will be next.

"If your property is not making a lot of money, or making a small amount of money, you know you should be looking over your shoulder because you could be the next person to get that tap," said another Yahoo employee who wished to remain anonymous.

Yahoo declined to comment for this story.

BARTZ STILL ENJOYS BROAD SUPPORT

Yahoo is hardly alone in cutting costs and underperforming assets in the weak economy. Even Google, which has weathered the recession better than any of its peers, has had three rounds of layoffs this year.

Employees credit Bartz with imposing much-needed discipline and accountability on a company long suffering from a lack of urgency and unified purpose.

Yahoo shares haven risen 15 percent since Bartz took over from co-founder Jerry Yang as CEO in mid-January, though the stock is still down about 53 percent from its 52-week high of $29.73 amid deal talks with Microsoft Corp (MSFT.O) last year.

In comparison, Google shares are up 28 percent since mid-January, but 34 percent below their 52-week high of $602.45.

The key to Yahoo's future, say observers, will be what Bartz does next.

About two-thirds of corporate turnaround efforts overall are unsuccessful, primarily because they don't evolve beyond cost cuts, said McKinsey & Co consultant Warren Strickland.

"You don't want to get in this spiral of cut, cut, cut, because people wind up de-motivated," said Strickland. "So even if you have to start that way, because it's a bad situation, sooner rather than later, it's good to say how we're going to take back market share."

Bartz has yet to offer details about her broader strategic vision, other than to flag the Yahoo homepage, Yahoo email and a few other properties as "core" to the company's future.

And the fate of Yahoo's search business remains unclear, with Bartz having recently met with Microsoft CEO Steve Ballmer about a potential partnership.

WAITING FOR PLANS

Yahoo faces a tough field of rivals, from Internet search powerhouse Google, which controls about 64 percent of the U.S. market for search, to social networking firms like Facebook, which increasingly compete with Yahoo for Web surfers' leisure time.

While Yahoo owns some of the Internet's most popular real estate, people inside and outside the company are still waiting for the plans to return to growth in the new Web landscape.

Collins Stewart analyst Sandeep Aggarwal said Yahoo's main weak spot is in social networking, with the company needing to get in the game through a partnership or acquisition, although Yahoo is moving forward with its own efforts to infuse social elements into its network of Web sites.

Some investors believe a joint venture with Microsoft to combine the companies' search and display advertising assets is the ideal path.

Analysts say Bartz has another two or three quarters of good grace with Wall Street before she needs to show results. Employees are nervous because they don't know if they're just being cleaned up to sell or spin off, said a former executive.

"The people there are just anxiously waiting for those focused goals to come out," the former Yahoo executive said.

(Reporting by Alexei Oreskovic; Editing by Tiffany Wu, Richard Chang)

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