Bubble bursts for Semel

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Terry Semel resigned under pressure Monday as CEO of Yahoo Inc. and the company handed the reins back to Jerry Yang, the billionaire co-founder of the search engine that became one of the Internet's earliest success stories.

Yahoo said Semel has assumed the role of nonexecutive chairman and will serve as an adviser to Yang, named CEO, and Susan Decker, who was promoted to president and is considered a prime candidate for the CEO spot someday.

Semel has been under scrutiny from shareholders who have expressed bewilderment at his generous pay packages while Yahoo stock has gone nowhere and rival Google Inc. widens its competitive lead. Semel, the former co-chairman of Warner Bros., has earned about $450 million, mostly from Yahoo stock options, since taking over as CEO in May 2001.

While Yahoo was rebounding from the bursting of the Internet bubble, Semel's hefty compensation was a nonissue. More recently, Yahoo dropped 35% last year while Semel earned $71.7 million.

That was a bit too much to take for shareholders, who criticized Semel and other top management at the company's shareholder meeting last week, prompting observers to speculate that Semel would soon be out.

Semel, however, earned kudos early on at Yahoo for quickly turning around the company and building shareholder value. When he joined six years ago, he purchased with his own money $1 million in Yahoo stock, which has more than tripled since then on a split-adjusted basis.

Much like the success he had while running Warner Bros. with co-chairman Bob Daly, Semel oversaw a rapid rise in revenue at the company. At Yahoo, sales jumped from about $750 million annually to $6.4 billion last year under his tenure. In the two decades Daly and Semel ran Warners, revenue there rose from $750 million to $11 billion.

But some said Monday that there was nothing spectacular about Semel's early success at Yahoo. Sure, the stock surged 225% during his reign — far outpacing the S&P 500's rise of 28.5% — but other Internet stalwarts also fared well. Shares of eBay, for example, are up 194% during the same time frame, and Amazon is up 387%.

More significantly, when Google, a direct competitor, went public three years ago, it had a market capitalization of $23 billion compared with Yahoo's $39 billion. But Yahoo's value has since shrunk to $37.8 billion, while Google's worth has catapulted to $160.5 billion.

"Semel was made the gatekeeper to the promise of the Internet, and he handed the keys to Google," said Cody Willard, a hedge-fund manager who has owned Google shares since its initial public offering.

Willard, who recently founded online video concern RevolutioNetwork.com, said that Semel mistakenly has been running Yahoo too much like a film studio or TV channel.

"The Internet is not to be centrally controlled," he said. "And Semel's Hollywood-crony approach to media is completely out of place in the age of empowerment."

Indeed, one of Semel's missteps, critics said, was hiring former ABC Entertainment chairman Lloyd Braun to run the Yahoo Media Group. While Braun was busying himself with minimally effective online entertainment creations, YouTube and its user-generated video was taking the Internet by storm. Braun lasted only two years at Yahoo, and when Google purchased YouTube for $1.65 billion, industry pundits largely saw it as a Google victory at the expense of Semel, Braun and Yahoo.

Investors on Monday took Semel's resignation and the elevation of Yang and Decker as a positive sign. Yahoo shares advanced 3% during the regular session and another 5% in after-hours trading, when the announcement was made. Yahoo was the second-biggest gainer Monday on The Hollywood Reporter's Showbiz 50 stock index.

Semel's announcement was coupled with more bad news on the earnings front for Yahoo. During a conference call with analysts, executives said that while its new Panama ad-search initiative is performing better than was expected, its lagging display ad business will negate Panama's gains in the current quarter.

"The past year has been a difficult one for Yahoo. I know that none of us has been satisfied with the results," Semel said during the call. "I saw myself more as a coach rather than as a player going forward."

Yang, also on the call, seemed to dismiss speculation that Yahoo is interested in being acquired by a larger company. While news of such interest from Microsoft a few weeks ago led to a brief surge in Yahoo shares, Yang told investors Monday that he expects Yahoo to remain "a vibrant independent company."

Semel's rocky tenure as an Internet leader began April 17, 2001, when he said he would replace Yahoo CEO Tim Koogle. Although he wouldn't start for another month, Yahoo shares leapt 8% the next day.

"He did a good job at Yahoo, especially at the beginning," said Hal Vogel, president of Vogel Capital Management and a longtime media and entertainment analyst. "They needed an injection of a media- and entertainment-savvy executive. And the stock did extremely well in the early going to reflect that."

Semel streamlined operations and laid people off to focus Yahoo on key business areas and at the same time used his experience in diversifying revenue from his old Warners days.

Getting money only from online advertising is risky, especially when stock markets fall on hard times and marketers cut their budgets, Semel argued as he successfully launched premium services.

But enthusiasm for Semel turned to disillusionment with the ascension of Google.

"Yahoo definitely lost momentum relative to its peer group," Vogel said.

Semel left Warners in 1999, before the much-maligned AOL-Time Warner merger.

Although nearly every major Hollywood studio was believed to be interested in his services, Semel instead chose to spend time outside the spotlight and launch his own technology investment firm, Windsor Media, where he learned more about the Web business.

When Yahoo searched for an experienced CEO, Semel emerged as the winner. Semel said in an interview six years ago that he met Yang because of Windsor Digital, and Yang said he was attracted to Semel because of his "personal integrity and a track record for building a business."

According to reports about his early Yahoo days, Semel and his much younger staff were in for somewhat of a culture shock. For example, top executives worked in the same size of cubicles as others — a rule that Semel changed.

Semel earned positive reviews for some deals early on in his tenure, such as the acquisitions of HotJobs.com, Inktomi and Overture Services. Since then, observers said Yahoo often seemed too careful and slow in jumping on new trends or takeover opportunities, with Semel's conservative approach often getting the blame.

Leading shareholders last week asked Semel at Yahoo's annual meeting whether he still had the fire in his belly or whether he was simply content to be No. 2 in the Internet search world.

While Semel defended his firm and his record, Wall Street sources said Monday that last week's meeting likely was the final straw that led to the downgrade in Semel's responsibilities.

Paul Bond reported from Los Angeles; Georg Szalai reported from New York.
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