Can Jerry Yang fix Yahoo?

Imagine this: a company has a $35 billion market cap, a P/E of 50, annual revenues of $5 billion, annual profits of $500 million, 60% gross margins, and about $3 billion in the bank.

Nice fundamentals, right? Now imagine the same company being characterized as "embattled." What could possibly be so wrong with this picture that an outcry from investors got the CEO booted?

The company in question, of course, is Yahoo. And what's wrong is that archrival Google has figured out how to mint money with search ads and now boasts a market cap of $170 billion and $3 billion in annual profits. The bad news for Yahoo is that advertising, for the most part, is a zero-sum game. Google's good fortunes spell boohoo for Yahoo.

It doesn't help that, in 1998, Chief Yahoo and co-founder David Filo encouraged Google's founders to start a search-engine company. Or that, in 2002, Yahoo had a chance to buy Google for $5 billion and passed.

The irony of those missed opportunities isn't lost on anyone; every Yahoo employee and shareholder has felt its demoralizing effects, not to mention Yahoo's deteriorating share price. All it took was a whopping $71 million executive pay package for CEO Terry Semel to put investors over the edge.

Less than a week after the company's annual shareholder meeting, Semel was out and Chief Yahoo and co-founder Jerry Yang was in. Until then, Yahoo had employed seasoned executives at the top--first Tim "TK" Koogle and later Semel. Still, founders Filo and Yang have remained actively involved in the company's evolving business strategy and technology.

But Jerry Yang as a turnaround CEO? I admit--I didn't see that coming.

The other thing I didn't see coming was the board reacting so quickly without, to my knowledge, a search for outside candidates. And it's not at all clear whether the board had time to conduct an objective review of the company's competitive position and what leadership skills might be needed for a successful turnaround.

On the other hand, it's all too easy to become internally focused and lose perspective when you're under that much pressure. And the board--as solid a board as I've ever seen--was under considerable pressure.

To be sure, Yang is a visionary--a brilliant, innovative and accomplished man. But is that what the company needs right now? Does Yahoo suffer from lack of vision? The problem is search advertising. It's not clear that Yahoo's missteps in that area were caused by anything but missed opportunities and failed execution.

Here's my primary concern, in a nutshell. With the company confronting the most daunting of competitive challenges in a mind-bogglingly fast-paced industry; with $35 billion of market cap and thousands of employees at stake; with half a billion users and an entire ecosystem on the line; is it prudent to bring in someone who has never run a company before?

Now, before some of you Yahoos out there flame me, remember that I'm trying to be objective about this. After all, I'm a consultant; it's my job to be objective. And having competed with the likes of Intel, and having been involved with a turnaround or two, I can certainly empathize with the enormity of the task ahead of Yang. That's what's making me nervous.

Yes, Yang has Susan Decker at his side. But, impressive as Sue is, aside from running the company's advertising and publishing group for seven months, she's never run a company or a business either. Of course Yang and Decker are both extraordinarily competent senior managers with complementary skill sets. But the most seasoned, accomplished CEO would find the company's current situation to be extraordinarily challenging.

Now, don't get me wrong. Although Google is eating Yahoo's lunch in the most lucrative growth market, and reversing that trend will be slow and painstaking at best, the situation is far from unrecoverable. Yahoo has tremendous assets to leverage, going forward. Yahoo has more Internet users and knows them better than any other company on the planet. It has a broad range of services to offer all those eyeballs and wallets. It has a powerful brand. And it has a talented young executive management team, although retention will continue to be a challenge if the situation doesn't soon improve.

As for selling the company, first, I don't think the situation calls for it. The company has unique assets, a strong brand, and solid fundamentals. Second, even with its stock at current levels, it's still big and expensive. Third, I don't think an acquisition changes much; the buyer still gets saddled with the same competitive hurdles.

In my opinion, Yahoo is a workable, if not challenging, turnaround. And a successful turnaround requires three things: 1) objectivity--to accurately assess the situation, 2) experience--to determine the new strategy and plan, and 3) leadership--to sell it and execute. Smarts is a given.

In the case of Yahoo, I don't think the Yang-Decker combination meets those requirements. Yes, it was a bold, if unconventional, move. But it may prove to be too risky to either reverse the company's fortunes or to satisfy shareholders.