Jerry Yang Wants to Take Yahoo Private

Jerry Yang is working on a private-equity buyout of Yahoo that will allow him to regain management control.

Yahoo co-founder Jerry Yang appears to be working on a private-equity buyout of Yahoo that will allow him to regain management control, according to rumors that surfaced recently in the Business Insider blog and a Reuters article.

Yang’s stake in Yahoo is down to 3.63 percent as of April 2. His Stanford buddy and co-founder David Filo — who is likely to support any private buyout engineered by Yang — owns 5.9 percent. Any such deal would involve the pair rolling over their stakes into an interest in a non-public entity that would be created by a private equity firm that would raise the funds needed for the buyout.

At the moment Yahoo shares are trading at around $15.84. Three years ago Microsoft had offered to acquire Yahoo for $33 per share, or $47.5 billion. The bid was rejected by Yang who was then heading the board. When Microsoft walked away Yang was criticized by some shareholders as having turned down the bid because of his own sentimental attachment to Yahoo. As a result, Yang no longer enjoys the influence he once did with either the board or the management.

After Carol Bartz was fired from the CEO post in September the Yahoo board has been conducting a strategic review with advisers at Allen & Co and Goldman Sachs. The possibilities they are reviewing would include a sale to various parties who have expressed unsolicited interest in buying the firm.

One ardent suitor is Jack Ma, founder and CEO of Alibaba’s, China’s leading B2B e-commerce portal. Ma has said he would be “very interested” in engineering a buyout of Yahoo, in part because Yahoo owns a 40% stake in Alibaba. Yang had responded to that overture by saying Yahoo was not for sale.

Another suitor is Microsoft which has been showing renewed interest. Others include private equity firms Silver Lake Partners, Providence Equity Partners, Hellman & Friedman and Bain Capital which owns large stakes in other media firms, including Clear Channel Communications and The Weather Channel.

Most agree that Yang, 43, would need something like divine inspiration to engineer a turnaround of Yahoo’s fortunes even if he were to engineer a buyout. The internet’s pioneering portal has seen its share of the U.S. search market erode to 16 percent in August, down from 19 percent two years ago. Microsoft, with which Yahoo has a search deal, has raised it share from 9 percent to 15 percent during the same period while Google’s share has stayed level at 65%.

On the banner advertising front Yahoo has seen its share fall to 10.2 percent in June compared with Facebook’s jump to 32.4 percent in June 2011.

One possible scenario for Yang after taking Yahoo private would be to sell off its assets to pay down the debt incurred in a buyout. In addition to the 40 percent stake in Alibaba, it owns a share in a partnership with Masayoshi Son’s Softbank in Japan. Yahoo also has cash of about $12 billion. All told the assets could wipe out the cost of the buyout, leaving Yang free to resume management control of Yahoo’s U.S. operations which are currently valued at around $5-6 billion.

During the past six months Yang is reported to have been coming into Yahoo’s Sunnyvale offices to work the phones, presumably in talks with entities that may be able to help him regain control of Yahoo’s fate.

Those who know Yang say he has a fiercely competitive streak that may be driving his push to regain the role he once played with so much relish as an internet visionary at the head of what was considered the world’s coolest tech pioneers during between 1996 and early 2001. If he is to have any hope of achieving that goal, he would need to first shrug off the weight of Wall Street analysts looking over his shoulders.

Its easy to forget that back in 1997 Jerry Yang voluntarily removed himself from direct management of Yahoo to become a sort of goodwill ambassador for the firm and for the internet at large.

“People always ask me why I took myself out of the day-to-day operating responsibility,” Yang explained a few years later. “That’s never what I wanted to do, and besides, I knew so little about business that I didn’t want to slow things down when the company began to scale up. And anyway, to me, the broader the role, the more exciting it is. Yahoo is in everything from pets to old people to finance to communications to e-commerce and more, and I really thrive on that.”

To Filo, Srinivasan, Koogle, Mullett & company Yang left the obscure toil of screwing nuts to bolts and set off to spin the homey yarns and platinum platitudes that keep journalists eating out of your hand. Between the time Yahoo incorporated in April 1995 and January 7, 2000 when it peaked out at a valuation of nearly $140 billion, Yang appeared on countless magazine covers and TV broadcasts around the world. In the calculus of modern business, the value of that exposure at prevailing cost-per-thousand rates equals Yahoo’s peak valuation.

“To me, building an organization that scales smoothly is the true test of an entrepreneur,” he told Fortune in 2000. “Often what it comes down to is how well the founders continue to scale themselves. Look at what Andy Grove did in the last 25 years at Intel, or Bill Gates or Steve Jobs. I’m still a babe compared with them.”

The first big step down the road to turning a hobby site into a media company came naturally enough. A Golden Bear named Masayoshi Son — known as Japan’s Bill Gates, though more Yang’s age — had bought himself a dominant 37% stake in the two wild Cards’ creation and had leveraged it into collateral for the purchases of digital publisher Ziff-Davis. As early as 1996 Son interested Yang and Filo in taking the Yahoo name into print with titles like Yahoo Internet Life and Yahoo Computing.

By April of 1999, with Yahoo’s stock price soaring past the $150 mark, Yang felt the whipcrack of analysts frothing at the mouth about the internet’s limitless potential and sniping at Yahoo’s seeming unwillingness to leverage its user-base into media-giant status. This is the monkey that Yang now wants to get off his back once and for all.

Jerry Chih-y’an Yang was born the elder of two sons in 1968 in Taipei to a father who had immigrated from China and a mother who taught English and drama at a local university. Jerry was two when his father died, placing on his mother Lily the burden of supporting the family. She moved the family to San Jose in 1978 to save Jerry and Ken from Taiwan’s obligatory military service.

The boys suffered the usual hardships of newcomers with zero English ability. “We got made fun of a lot at first,” recalls Jerry Yang. “I didn’t even know who the faces were on the paper money. But when we had a math quiz in school I’d always blow everyone else away. And by our third year, my brother and I had gone from remedial English to advanced-placement English.”

By his senior year at Piedmont Hlls High Yang had established himself as BMOC. He played on the tennis team, was elected student body president and delivered the valedictory at graduation — all while taking enough AP courses to skip his freshman year at college.

He sorted through scholarship offers, considered Cal and Cal Tech but ultimately settled on Stanford. The reasons he cites are that it let him stay close to home and didn’t force him to declare a major right off the bat. “I thought I wanted to be an electrical engineer, which I turned out to be,” he says. “But I was always curious about other things too, and what if I got interested in history or the law?”

With his running start Yang completed both his BS and masters in four years. The most important thing he learned as a Cardinal? The science of sorting and shelving books at his part-time job at the university library. “That’s where I first learned about how systematically information was categorized — you know, the Dewey decimal system and all that.”

Yang’s first encounter in 1989 with future partner David Filo has passed into Silicon Valley legend. Being two years older, Filo was the instructor for one of Yang’s math courses, the one in which he got the lowest grade of his Stanford career, Yang likes to gripe. They shared passions for sports and math but didn’t become pals until 1992 when both participated in a six-month academic exchange program in Kyoto.

Actually Japan proved to be a crucial nexus for many of Yang’s most important relationships. It was during those months that he met future first wife Akiko Yamazaki, a Costa Rican of Japanese ancestry who happened to be attending Stanford. “When we argue,” Yang laments, “Akiko says I always have the advantage because English is my second language but it’s her third language.”

In Kyoto Jerry Yang also met Srinija Srinivasan, then a 26-year-old Stanford grad who, two years later, would become Yahoo’s fourth employee, the “Ontological Yahoo!” responsible for organizing the hierarchical structure of its first incarnation. And Yang’s acquired ease with Japan and its culture would help attract seed money from Masayoshi Son and, later, establish Japan as the most successful of Yahoo’s international markets, supplying nearly a fifth of its traffic.

When they returned to California the internet was hatching from the chrysalis of academia to become a kind of underground communication network for personal computer nuts. What really got the buzz going was a browser developed at the University of Illinois’s National Center for Supercomputing. The new application was explained as “a new way of looking at information on the internet”. Yang and Filo thought it was an awesome way to keep track of important data like stats on NBA teams and sumo wrestlers. Their biggest gripe was the difficulty of having to rely on hit-or-miss grassroots referrals to locate information sources.

There’s a fairy tale quality to the events that began in late 1993 when Yang and Filo were PhD students studying computer-aided chip-design. They were also awakening to the internet’s commercial possibilities, thanks to some venture courses. Their first crack at a useful tool was a web page put up by Yang containing his name in Chinese characters, his golf scores and a list of his favorite internet sites. Six months later he and David Filo hit on the idea of Yahoo!, a name suggested by a slur tossed at them by Filo’s dad. The yahoos turned it into an acronym by reverse-engineering the mock-sonorous “Yet Another Hierarchical Officious Oracle.” Whatever, it worked. By early 1995 the site was bookmarked on every browser in cyberspace.

“Through most of 1994, even though we were playing with Yahoo as a hobby,” Yang recalled, “we were looking for another startup idea. We really didn’t think Yahoo could possibly be it. There was no real business model that fit it. For example, we knew we had to keep it free because everything on the Internet was free. So there was no way to charge people for using it or even to charge people for their sites to be listed on it. And besides, we were just two guys slaving away on the technology. What did we know?”

The pair practically lived in the trailer that housed the university servers on which Yahoo was based. Its mushrooming traffic was putting a strain on Stanford’s computer network. At the end of 1994 irate officials demanded they find another home, forcing the duo to recognize that it was time to fish or cut bait.

“David had it in his gut very early on that Yahoo could ultimately be a consumer interface to the Web rather than simply a search engine or piece of technology,” recalled Yang. “We weren’t really sure you could make a business out of it though.” They neglected their PhD work to pump all their energies into Yahoo, but when it came to starting a commercially viable business, they were still leaning toward starting a site to sell college textbooks.

What ultimately convinced them to try to turn Yahoo into a business was their first call from a venture capitalist, Mike Moritz of Sequoia Partners. Among the investors Moritz lined up were Masayoshi Son, a young Corean Japanese who had founded Softbank, Japan’s most successful digital publisher. Son had the instinct to snap up a 20% stake in Yahoo! By mid-1995 the duo held in their sweaty hands a check for their first million in venture capital. A few months later Yahoo! issued its initial public offering (IPO). Son snapped up another 17.02%, making himself controlling shareholder.

By then the stakes of Yang and Filo had been cut to about 12% apiece. Son had the sense to stay out of the public eye in order to preserve the company’s freewheeling American flavor and image. A seasoned professional management team was installed to hold down the CEO, COO and CFO spots but Son kept the young founders in place as Yahoo!‘s heart and soul under the title of Chief Yahoos. Their unofficial portfolio was to ooze irreverent inspiration. Yang was the more outgoing and better suited to carrying an empty briefcase while schmoozing on the cellphone. Filo took on a behind-the-scenes role with the subtler responsbility of keeping the company from getting ahead of its technological and financial resources. To clearly delineate his authority and responsibilities in Yahoo terminology, he carved himself the title “Cheap Yahoo”.

The more Jerry Yang caught the limelight, the more his partner David Filo seemd to melt into the shadows. By February of 1996 Filo had even relinquished his rightful seat on the board of directors for better to get his hands on the site’s levers without the distraction of ceremonial duties. While Yang met Al Gore, Filo checked loadtimes. Both the cheerleader plenipotent and ubergeek roles were essential to Yahoo. Somehow the partners — who had enough in common to be buddies — adjusted themselves to the full gamut of the demands of turning a hot startup into a digital bluechip.

In five years the duo parented Yahoo’s growth from two to 2,000 employees. For any fast-growing organization the peril most difficult to avoid is losing the unique appeal that gave it life. Yahoo’s success in preserving its exuberant image and attitude while multiplying its offerings Yang credits to the strong marriage in which each partner could count on the other to cover the alpha to his omega.

“We knew right from the beginning that we had to build an organization that could scale up and do it fast, because the internet itself was exploding,” Yang recalled. ”To me, building an organization that scales smoothly is the true test of an entrepreneur. Often what it comes down to is how well the founders continue to scale themselves.”

Now the world may have a chance to see how well Jerry Yang can scale Yahoo down to something over which he can once more work his old magic.