A ray of hope for Yahoo?

Financial Times

First, the good news: Yahoo's latest appointment of a chief executive was handled with the minimum of chaos. The arrival this week of the experienced Google product manager Marissa Mayer wasn't preceded by the usual barrage of leaks and second-guessing.

The bad news is that, given the turmoil Yahoo has been through recently, the hapless internet company has had too much practice at getting this sort of thing right. Including interim holders of the title, this is the fourth CEO in less than a year. Yahoo was overdue, finally, for a smooth transition.

But there's a more positive way to view things: it may finally have a board that can shoot straight.

If so, then you can credit Dan Loeb, the activist investor who recently muscled his way on to the board. Mr Loeb took personal control of the appointment process, according to three people familiar with the company. He insisted on a full “lockdown” of the board discussions, of the kind companies normally go into when handling a major transaction.

At one point, board members meeting at a Silicon Valley law firm were unexpectedly put on a bus and taken to another, unannounced venue to meet Ms Mayer, according to a person close to the process. Communication was limited to the board and the new CEO, with even top Yahoo executives and advisers left in the dark. Mr Loeb's own staff handled the announcement.

The ability to pull something like this off smoothly is of more than symbolic significance. You only have to look at the shambles Hewlett-Packard made of trying to repair its own leaky board - resorting to spying on its own directors and journalists - to understand how badly things can go wrong. Unfortunately for Yahoo though, the fact that it may finally have a more professional board is about as far as the good news goes.

There's no easy fix for what ails the company. If Ms Mayer is to make Yahoo relevant again, she needs to pull off two things that require vastly different management skills simultaneously: restructure the company's core Web 1.0 business while at the same time putting it back on the disruptive, leading edge of internet development. And she has to do this in an industry that, with the move to pervasive mobile access, is facing a period of unusually rapid change, even by its own fast-moving standards. That's like carving a turkey and juggling with eggs - all while riding a unicycle.

The Yahoo core needs immediate attention. Last year, free cash flow was down more than 40 per cent from the peak of 2007 and it is forecast to drop again in 2012.

Protecting this cash flow is the most important task Ms Mayer faces. Unpalatable as it sounds, that means massive cost-cutting. If she is to avoid the perennial overhauls that have left staff downtrodden and demoralised (Yahoo has taken restructuring charges in each of the past five years), then it should happen quickly.

The main reason for hiring Ms Mayer, though, lies in her record of overseeing the creation of some of the web's best-known services, from Gmail to Google's now-familiar “universal search” results. Although still only 37, her 13 years at Google qualify her as a bona fide internet veteran.

To the extent that Yahoo's main challenge will be to bring back the talent needed to breathe fresh life into its services, then, as Silicon Valley's most prominent female engineer, she has a lot going for her.

Not that it will be easy. Yahoo's faded reputation - and her own mixed reputation as a manager, whether fairly gained or not - will force the company to pay up to secure the teams of developers it will need, as well as the promising new services it has failed to generate in-house.

Ms Mayer will at least have at her disposal two commodities that promising young start-ups hanker after: an audience measured in the hundreds of millions and cash balances measured in the billions. Success will depend on how well she trades those assets for talent and growth potential.

Whether Yahoo's shareholders will have the stomach for what lies ahead is another matter. Under a previous, more accident-prone board, the company looked late last year at selling a minority stake to private equity investors to back an acquisition drive. Its investors revolted.

Eventually, for Ms Mayer, there will be only one measure that counts: Yahoo needs to generate more than the present $6.50 a year in annual revenue for each of the 700m or so people who come to one of its services every month.

Her new board will have to work overtime to give her the support for what lies ahead.

Richard Waters is the FT's West Coast managing editor