Three Reasons Yahoo Inc. (Nasdaq: YHOO) Could Rally Without Co-Founder Jerry Yang

Seventeen years after starting one of the first Internet content companies, Yahoo Inc. (Nasdaq: YHOO) co-founder Jerry Yang resigned yesterday (Tuesday) - giving Yahoo a fighting chance of rising from its dismal decline in the tech world.

The departure of co-founder Yang, who also served as CEO from June 2007 to January 2009, marks the latest casualty as Yahoo strives to compete against more modern tech companies. Yahoo two weeks ago announced it had chosen a new chief executive officer - Scott Thompson, most recently president of eBay Inc. (Nasdaq: EBAY).

Shareholders have been pushing for Yang's exit as search leader Google Inc. (Nasdaq: GOOG) and social media giant Facebook Inc. have dominated markets in which Yahoo failed to gain traction.

Still, Yang's decision was a surprise because of his deep personal attachment to the company.

"Jerry's thrown in the towel," Colin Gillis, a BGC Partners analyst, told Bloomberg News. "He founded the company - this is his baby."

Yahoo Co-founder Jerry Yang a Pioneer

Yang started the company in 1995 with David Filo while both attended Stanford University. Yahoo went public in 1996 and at its heyday in 1999 was worth more than $120 billion.

The company survived the dot-com bubble, but with a new rise of tech standouts it has since tumbled to its current market cap of $19.7 billion.

Despite the company's struggles, Yang's contributions to the industry made him a pioneer in Web content and search.

"The near-term Wall Street reaction is that [Yang] wasn't doing a good job," Mark Mahaney, a Citigroup Inc. (NYSE: C) analyst who covered the industry since 1998, told The Wall Street Journal. "But the longer-term perspective is that he will go down as one of the top 10 Internet entrepreneurs."

Yang's personal involvement in creating Yahoo may have clouded his judgment as a board member, angering shareholders.

Investor ire intensified in 2008 when Yahoo rejected a $45 billion takeover offer from Microsoft Inc. (Nasdaq: MSFT). Yang admitted at a conference that year he knew he'd be labeled as putting his personal attachment to Yahoo ahead of shareholders' best interest.

"Yahoo suffered from the founder syndrome," Youssef Squali, a Jefferies Group Inc. (NYSE: JEF) analyst, told The Financial Times. "Nothing was good enough for his company."

Now without Yang's emotional ties to Yahoo and old-school tech mentality, Yahoo has a chance at revival - and a chance to boost its sinking stock.

Three Reasons Yahoo Inc. (Nasdaq: YHOO) Could Rally

Out with the old: Yahoo belonged to the older generation of tech companies, which is becoming polarized from a newer crop that is more in touch with consumer needs and trends. New companies flourish in mobile computing, social media, and search capabilities; Yahoo has fallen behind.

One of the reasons these newer tech start-ups are more willing to adapt to consumer needs is their younger leadership, like 27-year-old Facebook head Mark Zuckerberg. Where Zuckerberg is touted as an innovator, Yang resisted change.

And change is essential to an industry where companies die without innovation.

"[Yahoo] hasn't changed with the time," Kara Swisher, co-executive editor of tech news site AllThingsD, told American Public Media's "Marketplace" program. "It's a paradigm company of another era in computing. It doesn't have a strong mobile strategy. It is still wedded to the desktop. It is still in the old paradigm of portals versus social. It goes on and on. It missed a lot of these opportunities to change themselves. And after a while, in technology, if you don't change, you die."

A post-Yang Yahoo will have more flexibility to modernize.

Yahoo shareholders got their way: Yang's position as co-founder, director, and shareholder created a conflict of interest that led shareholders to question if Yang was acting on behalf of the company's needs.

For example, last year Yahoo entertained the idea of selling to a private equity firm. One such proposal involved Yang joining a new Yahoo ownership group with some of the private equity buyers. Activist investor Third Point LLC spoke against the alignment.

Yang "must declare if he is a buyer or a seller - he cannot be both," Third Point said in a statement.

The investor battle with Yang heated up in 2011 after the firing of then-CEO Carol Bartz when shareholders called for the resignation of several Yahoo board members, including Yang. Third Point has even threatened a proxy fight against Yahoo.

While Yang claims he left voluntarily, he faced mounting pressure from disgruntled shareholders. In a sign of their approval, Yahoo stock rallied as much as 4% in after-hours trading Tuesday after Yang's exit was announced. The share price has remained steady since Yahoo announced Thompson's appointment Jan 4.

Smoother negotiations: After botching the Microsoft deal in 2008, Yahoo wants to show shareholders it will act in their best interest when considering mergers and acquisition offers.

Yang's involvement in private equity and acquisition proposals was rumored to create a tense negotiating environment. He often disagreed with the board's consensus, leading to many dropped deals and investing opportunities.

New CEO Thompson pledged he would reevaluate the company's options, starting with its minority investments in China's Alibaba Group Holding Ltd. and Yahoo Japan Corp. The company has a 40% stake worth $14 billion in Alibaba. Selling those assets would unlock value and appease shareholders while the company regroups under Thompson's leadership.

"By clearing out some artifacts of the past, it's symbolic of the company's desire to move forward," Allen Weiner, a Garnter Inc. analyst, told Bloomberg. "With Jerry out of the way, it will perhaps make negotiations with the folks at Alibaba easier."

Yahoo Inc. stock rose 3.18% Wednesday to close at $15.92.

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