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Even Yahoo! Gets The Blues

CEO Semel's next turnaround task: Boost morale and keep employees from leaving

It was a bit of good news that Yahoo Chief Executive Terry Semel really needed: Following a lengthy search, the Internet company on May 15 hired a new chief financial officer to succeed Susan Decker, now head of Yahoo's key advertising group. But the appointment of Blake Jorgensen, co-founder of investment bank Thomas Weisel Partners Group Inc., also fueled renewed speculation that Yahoo! Inc. Yahoo might be seeking to shed assets or even get acquired as it struggles to catch up with runaway rival Google Inc. Yahoo's stock fell 1.7% on an up day for the market. The reaction was emblematic of the pall over Yahoo that its leaders seem unable to lift. On May 4, reports that Microsoft might buy Yahoo sent the latter's stock soaring--and Yahoo résumés flying to companies such as Google and Apple --before it turned out the buyout talks were long cold. That followed a disappointing 11% drop in first-quarter earnings on Apr. 17, with revenue growth of 7% badly trailing Google's 63% sales jump. Yahoo's stock plunged 12% the next day, prompting speculation that Semel was vulnerable.

Now, as a steady stream of Yahoos, from vice-presidents to engineers, continues to seek greener stock options at Google and innumerable Web startups, people close to the company worry that a crisis of morale could cripple its efforts to turn itself around. "Morale is really down," says one active recruiter, who's talking to a "C-level" Yahoo exec about jobs elsewhere. One vice-president who left last year had to stop using Yahoo's instant-messaging service for six months after being inundated with e-mails from former colleagues seeking a job or career advice.

The biggest concern, according to some former Yahoos: The departed now include more people who have been with the company for six or more years of its 13-year existence--not the very top execs, but the seasoned middle managers Yahoo needs to carry out its ambitious turnaround plans. "The last wave is folks who have been there a long time," says former Yahoo Vice-President Teresa Phillips, co-founder and CEO of stealth startup Graspr, who left last year on good terms. "Now it's the people who have the institutional knowledge who are leaving." Some recent departees worry that if the company can't soon create more excitement around its products--and its stock--the steady trickle of attrition could become a flood and include senior executives.

Yahoo says that it's not having more trouble with hiring or attrition and that some of the departures are a natural result of the restructuring. "You want to mix things up, you want to reshuffle the deck a bit," says Jeff Weiner, executive vice-president of Yahoo's Network Div., which includes media, search, and other services. Nonetheless, Yahoo says headcount grew by 16% in the past year, and 90% of job offers are accepted. And it says "regrettable attrition"--people it didn't want to lose--is down.

The company also points to progress since a reorganization last December. It got its long-delayed new search-ad service, Panama, out the door in February to generally positive reviews, though it has yet to boost the bottom line. Yahoo inked ad deals with Comcast and Viacom, and on Apr. 30 snapped up the rest of online ad exchange Right Media for $680 million. At the same time it has cut redundant operations, for instance axing Yahoo Photos in favor of its photo-sharing site, Flickr. So in some Yahoo quarters, at least, things are improving, helping revive the morale of the people involved.

The question in the minds of many people close to the company is whether all this is too little, too late. The key problem, according to many former Yahoos, is an organizational structure that still requires multiple division heads to sign off on big projects, sometimes delaying them for months. The result, they say: While Yahoo has managed to produce some successful new services, such as Yahoo! Answers, it doesn't boast world-beating services such as MySpace and Facebook.

Now people inside and outside Yahoo again are asking a question that has come up over and over in the past year: Can Semel, who saved Yahoo from dot-com oblivion after he arrived in 2001, do it again? "I think Terry is an asset," says a former Yahoo who notes that the company needs a seasoned media exec in charge. "The question is: Is he the right guy to rally the people?" Clearly, many of Yahoo's 11,700 employees think so. Problem is, many others keep voting with their feet.