Dear Yahoo board: Your investors are on Line 2 and they're not happy

It's not often that I get e-mails and calls from major Yahoo shareholders that begin with "idiotic" and end with "moronic." But that's pretty much the tone of investor sentiment Friday in the wake of Yahoo's escalating dispute with its Chinese partner Alibaba Group.

And that was the nice stuff.

"It is a sad and perplexing situation," said one major Yahoo investor, who declined to be named. "Alibaba is supposed to be a shiny jewel for Yahoo and now it is tarnished badly."

Said another more flatly: "This is a crisis of leadership at Yahoo, and the board needs to do something about it."

By that, the shareholder was talking about the removal of Yahoo CEO Carol Bartz, who has had a rocky relationship with Alibaba execs, especially CEO Jack Ma.

A spate of Wall Street analysts who cover Yahoo also weighed in mostly on the negative Friday.

As Jordan Rohan of Stifel Nicolaus noted in part in a note about Yahoo titled "Trust Is the Key Issue":

"If Yahoo knew of this transaction yet failed to disclose it, for whatever reason, investors could lose faith in other Yahoo disclosures. If Yahoo did not know about it, trust issues loom even larger, as one could conclude that other material transactions may have occurred and were not disclosed."

And now, the latest kerfuffle between Yahoo and Alibaba is turning out to be a digital version of "War of the Roses," in which a divorcing couple battles to the bitter end over their house.

Note to Yahoo and Alibaba: At the finale of that fabulous movie, the Roses are both crushed under a lovely chandelier.

But prospects of disaster has not stopped either side from holding back on public bickering Thursday and Friday, with both companies releasing conflicting and pugnacious statements about the circumstances around the transfer of Alibaba's Alipay online payments service to a separate entity controlled by Ma.

Yahoo said the transaction was made without its knowledge or board approval, claiming it was told of the move six weeks ago.

A Yahoo representative reiterated that to me earlier today:

"As disclosed in our statement on May 12, Yahoo! and Softbank were notified by Alibaba Group on March 31, 2011, of the two transactions that occurred without the knowledge or approval of the Alibaba Group board of directors and shareholders. Yahoo is in active and constructive negotiations with Softbank and Alibaba Group to preserve the integrity of this investment and maximize shareholder value."

Alibaba--which said it had to spin off Alibaba in order to acquire a license from the People's Bank of China--begged to differ on the knowledge part at least, noting that its board was informed of the situation as far back as mid-2009.

More to the point, since Yahoo co-founder Jerry Yang is one of only four members of that board, which includes Ma and also SoftBank's Masa Son, Alibaba was essentially insinuating that he knew full well what was happening.

The latest mess comes after a long and clearly difficult negotiating process between Yahoo and Alibaba about its relationship.

Essentially, Ma wants Yahoo to sell back some of its 43 percent stake and Yahoo does not want to let go of an asset that turned out to be one of the only parts of the company investors are enthusiastic about.

"It's already a sad statement that investors are buying the stock for businesses that Yahoo does not control at all," said one observer. "This fight makes it even sadder."

What Yahoo will do next will be critical, especially if it decides to escalate the situation with a lawsuit against Alibaba, which operates in China but is incorporated in the Cayman Islands.

Sources at both Yahoo and Alibaba said Yahoo had sent some saber-rattling letters on the situation and has even explored legal action in Singapore, where Alibaba has operations.

But every investor I spoke to Friday was hoping the Silicon Valley Internet giant would stop making loud public statements and drop its attacks on Alibaba in favor of negotiating a deal.

Joked one: "Yahoo needs to kill all the lawyers and bring in the deal-makers."

Added another: "I don't know who's in charge of messaging here, but they need to stop talking and thinking they can win this cat fight. It's not helpful and, more importantly, it's not working."

No, it is not at all, having given rise to all kinds of speculation about the tenure of Bartz and the ineffectual leadership on the Yahoo board.

But while several sources close to the Yahoo board said Bartz has been on thinner ice of late for a variety of reasons, it's not clear this incident is prompting any kind of ouster at this point.

But that could change, depending on how Bartz fixes the clearly dysfunctional situation.

Because investors I talked to agree that keeping on the course Yahoo has chosen with Alibaba is not tenable.

"The more Yahoo protests that it has been snookered," said one exasperated investor, "the more clueless it looks."

And the more its stock suffers. Yahoo shares are down more than 11 percent in just five days, a drop that comes after the company finally had begun to see its stock on the rise.

That should make the next week, all leading up to Yahoo's investor day on May 25, a very interesting one all around.