Replacing Semel with Yang was start of end game

Yahoo's board of directors made many mistakes during the company's long and failed takeover dance with Microsoft. 

But the biggest one came a year ago this month, when it brought back Jerry Yang as CEO to replace Terry Semel.

At that point, Semel was clearly weary of the job after failing to steer Yahoo forcefully in a single direction.  One half of Yahoo was focused on its online media business, where it's hope was to sell display ads alongside its Web properties -- many of which were the world's most popular.

But a whole other part of Yahoo was busy trying to improve its search business, via Project Panama, in the hopes of catching Google in the all important revenue-per-search metric.

While the Yahoo media sites were high profile -- all those digital music deals were straight out of the Hollywood mindset of Semel -- they cost a lot of money to operate and never delivered the kind of profits that Wall Street hoped for. 

On the other hand, even though the search business was second-rate compared to Google, it was still generating the majority of the company's cash flow.

Given that, it's easy to see why the board might want to bring back Yang and focus on catching Google at search. It was a challenge that could be led by the returning founder (read "hero") who could motivate the engineering corp, most of whom never got Semel and his Tinseltown philosophy.

But in choosing Yang, rather than finding someone from outside the company, the board ignored an important piece of data: Yahoo's stock price.

The only thing that had given it a boost during the past year were the rumors that accompanied Microsoft's earliest casual approached to Yahoo. Without that takeover premium, the collective wisdom of the stock market viewed Yahoo's prospects as pretty bleak.

Usually, when it becomes clear that a company's best hope at creating shareholder value is by selling out, founding CEOs are typically ousted, because their emotional ties to the company make them poor  negotiators.

You see this time and time again, where a new management team is brought in and within a year or two, an acquisition goes through. Yes, there are exceptions, as when Michael Dell returned to help stabilize the PC company. The difference, however, was that Dell was not a takeover play at the time.

But Yahoo's board believed that having Yang fix the search business was the company's best hope for a revival. We now know how wrong they were.

Yang's biggest moments during the past year came not in leading the search engineers. They came during one-on-one meetings with Microsoft Steve Ballmer wherein Yang turned down repeated offers ranging anywhere from $33 - $35 a share, depending on who you believe.

Either number would have gotten Yahoo shareholders a deal over $40 billion.

Today, the company is worth a third less. It's bleeding talent. It's just agreed to partner with Google on search in a deal that may very well get tied up for months by anti-trust regulators, given that the two companies control 80% of the search market. 

There's a chance this deal may not get approved at all. The fact that the two companies aren't yet talking about a European version perhaps reflects that continent's tougher stance on anti-competitive deals. 

As the regulatory scrutiny -- sure to be pushed hard by Microsoft -- drags on, what kind of message is Yahoo sending to its advertising partners. Those businesses have watched Yahoo spend two years and a lot of money trying to catch Goolge in search, they watched them throw in the towel and turn to Google to improve the product's revenue-generating abilities for Yahoo search users.

Now, the only thing that can save Yahoo is if they somehow cobble together their acquisitions and execute well in the display ad market. Yahoo must do this against Google and Microsoft and amid the distractions of shareholder lawsuits, executive departures, and Yang's wounded (perhaps lame duck) status.  

Yahoo is now operating from a position of weakness, and the responsibility for its state rests squarely on the shoulders of its board members. A year ago, they should have brought in some fresh blood from outside the company.