Yahoo made many mistakes before Microsoft bid

By Eric Auchard - Analysis

SAN FRANCISCO (Reuters) - Web pioneer Yahoo Inc's (YHOO.O) recent history is a long series of missteps that leave it little room to maneuver in the face of an unsolicited $45 billion takeover bid from Microsoft (MSFT.O).

Since its founding 14 years ago as the Web's first navigational guide, Yahoo has entered dozens of lines of business and become the online leader in everything from e-mail services to display advertising used by corporate marketers.

But many of its firsts have not panned out -- Yahoo was early among major companies to seize on the social network trend popularized by MySpace and Facebook, in which Web users share messages, photos and videos with select friends. But it remained too wedded to a decade-old idea of being a one-stop Web portal to embrace the new wave.

Promised changes, from new Web search advertising technology to do battle with rival Google Inc (GOOG.O) to the hiring of Yahoo co-founder of Jerry Yang as CEO, have failed to yield big changes and Yahoo is cutting jobs while Google keeps hiring.

Yahoo is struggling with the legacy of former chief Terry Semel, who from 2001 to mid-2007 led its resurrection from the dot-com crash and diversified it successfully into advertising. But a push into entertainment was far less successful.

"Yahoo was backed into a corner because they passed up compelling acquisitions," RBC analyst Jordan Rohan said. "It had an opportunity to buy Google and didn't. It could have bought Facebook for less than a couple billion dollars and didn't," he said referring to two of Yahoo's biggest rivals.

Microsoft, which on Friday announced a potential $31 per share bid for Yahoo, says the company now has run out of time.

PEANUT BUTTER MANIFESTO

In a letter to Yahoo's board, Microsoft CEO Steve Ballmer said Semel had rebuffed him a year ago when he sought to hold talks to merge, citing confidence in Yahoo's "potential upside" from planned reforms and a new advertising service, dubbed Panama, to challenge Google in the increasingly important Web search and pay-per-click advertising markets.

"A year has gone by, and the competitive situation has not improved," Ballmer wrote to Yahoo's board last Thursday.

Under Semel, managing at Sunnyvale, California-based Yahoo became ever more unwieldy as major operations, each with its own industry culture, grew up in Silicon Valley, New York, Los Angeles and in a variety of joint venture operations in Asia.

A leaked Yahoo internal memo in November 2006 called for a dramatic organizational shake-up and layoffs of up to 20 percent of the workforce to restore competitiveness.

Known as the "Peanut Butter Manifesto," the memo argued that Yahoo was spreading organizational resources too thinly. "I hate peanut butter," memo author Brad Garlinghouse wrote.

Repeated product delays, business restructurings and executive defections, including former Chief Operating Officer Dan Rosensweig and research head Zod Nazen, led Semel himself to resign as CEO in June, when he was replaced by Yang.

NO TURNAROUND IN SIGHT