We like Terry Semel. He was friendly to us in the brief period in which our Yahoo-Analyst / Yahoo-CEO careers overlapped. As Yahoo shareholders, we also enjoyed Terry’s early years as CEO, when Yahoo worked its way through its post-bubble collapse and the stock jumped about 7X. So we will begin this brief essay on Terry’s horrific mistakes by giving credit where it is due.
Terry got to Yahoo at the time when it needed his skills and experience the most: When it was reeling from the bubble-bursting and in desperate need of both adult supervision and crisp decisionmaking. In Terry’s early years, the company turned its display advertising business around, and–for a brief, happy period–almost regained its 1990s mojo.
Then came a series of mistakes that has left Yahoo in today’s desperate straits, barely able to control its own destiny. Terry doesn’t bear direct responsibility for every one of these errors, but he was ultimately responsible for all of them:
Yahoo–and Terry–fumbled the search ball, opening the door for Google. Sometime in the late 1990s, Yahoo made a colossal strategic error, one that has cost its shareholders at least $150 billion so far. What was that error? Yahoo began to stray from its “search and navigation” roots and obsess about becoming the next great media-and-entertainment company. Terry wasn’t responsible for the early strategic missteps, but he accelerated them when he arrived. For example, he opened a huge Los Angeles office and staffed it with media and entertainment folks like Lloyd Braun under the theory that that Yahoo needed to become more like a production company. Terry also commuted from LA, sending the message that Sunnyvale and the rest of Silicon Valley were just office parks annoyingly far from Mecca. Terry’s LA efforts eventually bombed. More importantly, he took the company’s eyes off the search business when it needed to protect it the most: When that start-up down the road was beginning to cannibalise it.
M&A Mistake No. 1: Failure to buy Google. Early in Terry’s tenure, he passed on the opportunity to buy the company that would one day crush Yahoo like a bug. Terry was willing to pay $1 billion. Larry and Sergey wanted $3 billion. Google is currently worth around $180 billion–while the deal-speculation-inflated Yahoo is worth about $35B.
Barcalounger culture, no sense of passion or urgency. We continue to be astonished at the speed with which Yahoo transformed from a company fighting for its very survival (2001-2002) to a lazy, complacent bureaucracy. Obviously a lot of Yahoos hit cruise control during this period, but responsibility for intensity, innovation, and culture starts at the top. From the langorous tone with which Terry delivered Yahoo’s quarterly conference calls, we always imagined that he was speaking from a chaise longue. This attitude was mystifying but defensible when Yahoo was gaining market share every quarter (for a few years, at the expense of the even-more-pathetic AOL and Microsoft). As soon as Yahoo began getting its clock cleaned by Google, however, the fact that Yahoo wasn’t quietly confident but asleep at the switch was revealed.
M&A mistake No. 2: Failure to rapidly buy and integrate Overture and attack Google in search. Terry did finally notice Google eventually, and he eventually bought Overture to allow Yahoo to compete with it. He also extracted a nice patent settlement out of Google (which came in the form of Google stock and which, unfortunately, he sold way too soon). Terry waited too long to make the Overture move, however, and thus ended up paying more than he should have for it. He also then took too long to integrate it.
The never-ending wait for Panama. Yahoo’s answer to Google’s search threat was two-fold: 1) Overture, which took too long to buy, and 2) Panama, which took way too long to roll out. If Yahoo had jumped on the Google search threat a few years earlier, it might have been a contender. Now, it’s share of the search business is headed steadily, inexorably toward zero.
M&A mistake No. 3: Failure to buy Facebook. As Wired tells it, shortly after the first Panama delay, Facebook’s Mark Zuckerberg and Terry had an agreement that Yahoo would buy Facebook for $1 billion–and that Terry then called him at the 11th hour and suddenly cut the offer to $800 million. Zuckerberg understandably walked. Yahoo missed its chance to acquire the next big Internet franchise.
M&A mistake No. 4: Failure to buy DoubleClick. Industry sources tell us that, a few months before Google bought DoubleClick for $3 billion, Terry had an agreement to buy it for $2.2 billion. For whatever reason, however, Terry failed to sign on the dotted line. Given Yahoo’s subsequent embrace of “display” as its salvation (as its search market share heads steadily but inexorably toward zero), this failure was catastrophic. Not only did Terry pass on buying the company that could have given Yahoo an absolute lock on the display business–he allowed it to fall into the hands of its largest, most fearsome competitor.
M&A mistake No. 5: Failure to sell to Microsoft. The recent shareholder lawsuit against Yahoo all but proves that Terry received a buyout offer of $40 a share from Microsoft in January, 2007, that he immediately passed on. Now, Yahoo is struggling (and likely to fail) to persuade Microsoft to pay $33, or else be chopped up into scrap. (And $33, needless to say, is vastly more than any other bidder could ever deliver.) First offers are rarely best offers, so it seems safe to assume that if Terry had engaged with Microsoft in January 2007, he could have sold the company for, say $45-$50 a share. Now, 18 months later, even with a potential Microsoft transaction on the table, the stock is barely clinging to $25.
Does this litany of errors make Terry Semel the worst big-company Internet CEO ever?
Well, Terry certainly has plenty of competition–Barry Schuler at AOL in the early post-TWX years, for example, or the forgotten CEO of now-bankrupt Exodus, or Tom Jermoluk of @Home, or many others who would probably give him a good run for his money.
But when one considers the competitive position that Terry enjoyed when he arrived at Yahoo versus the competitive position of the company when he left a short five years later (along with the hundreds of millions of dollars of compensation he received in the meantime), we think there’s a case to be made.