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The One Thing New Yahoo Inc. (Nasdaq: YHOO) CEO Scott Thompson Needs to Do

By , Associate Editor, Money Morning •

Four months after chief executive Carol Bartz was let go, Yahoo Inc. (Nasdaq: YHOO) appointed new CEO Scott Thompson to salvage the sinking Internet company and do something Bartz couldn't – win shareholder support.

Yahoo announced yesterday (Wednesday) that Thompson, most recently president of eBay Inc.'s (Nasdaq: EBAY) PayPal unit, is taking over the lead role. Yahoo is in dire need of new strategies to increase site traffic and attract advertisers if it hopes to defend against increasing competition from tech giants Google Inc. (Nasdaq: GOOG) and Facebook Inc.

Shareholders were frustrated with the decision, however, since they were pushing for the struggling Yahoo to sell.

"It's probably a slight negative because I think the best outcome for Yahoo would be an all out takeover by Microsoft," Brett Harriss, an analyst at Gabelli & Co., told Bloomberg News. "Hiring a new CEO makes the sale of the whole company unlikely."

Thompson is the company's fourth CEO in five years. Now the pressure's on him to win over shareholders and inspire investor confidence before the share price plunges.

New Yahoo CEO Scott Thompson a "Surprising Choice"

Thompson excelled at PayPal, contributing to its expansion into online daily deals and mobile payments and increasing PayPal users to more than 100 million.

However, he has no experience with content – Yahoo's bread and butter. Yahoo Chairman Roy Bostock said Thompson's primary focus will have to be on the company's "core business" – providing content in subcategories like news, sports, and finance.

"It's a surprising choice," Ken Sena, an analyst at Evercore Partners Inc. (NYSE: EVR), told Bloomberg. "Scott has a great track record in payments and has proven an effective executive at PayPal and has major tech chops and international experience, but as a content company, which Yahoo has increasingly become, his experience is kind of lacking."

Thompson told investors he wanted to explore Yahoo's options in the mobile sector. He'll also help the company realize more value from its minority investments in Alibaba Group Holding Ltd., China's biggest e-commerce company in which it has a 40% stake worth $14 billion, and Yahoo Japan Corp., or decide if it's best to sell those assets. A sale would appease shareholders while the company regroups under Thompson's leadership.

"If they can successfully complete the Asian asset transactions, in a way that is beneficial to Yahoo shareholders, I think it will buy them some time and they'll have a chance to build for growth," Ryan Jacob, of the Jacob Funds, told Reuters.

Is New CEO Thompson Better Than a Sale?

Yahoo has piqued interest from other tech and private equity firms over the years looking for acquisition or investment opportunities.

Microsoft Corp. (Nasdaq: MSFT) unsuccessfully pursued Yahoo in 2008. The offer valued Yahoo at $44 billion – more than double its current $20 billion market value. After the attempt fizzled, Microsoft developed its own search engine, Bing.

Since firing Bartz in September, Yahoo initiated a strategic review that triggered a new round of takeover interest.

Alibaba said in October it was considering making a bid for Yahoo. Yahoo was also approached last year with deals from private-equity firms like Silver Lake Partners and TPG Capital, but the offers didn't please shareholders.

For now, it looks as if Yahoo is off the market while new CEO Thompson gets his feet wet. That's not a bad move because if Thompson can start to build shareholder confidence, investor interest will boost Yahoo's share price and if it does sell it'll snag a better offer than what it could land now. Recent rumors have priced Yahoo for a sale at $14 a share – almost $2 below yesterday's closing price.

The key to Thompson's initial success will be acting fast. Thompson doesn't have much time before investors' increasing pessimistic outlook on Yahoo could push the share price even lower.

Yahoo fell 3.1% yesterday to close at $15.78.

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