Peanut butter manisfesto

In a letter to Yahoo's board, Microsoft CEO Steve Ballmer said Semel had rebuffed him a year ago when he sought to hold talks to merge, citing confidence in Yahoo's "potential upside" from planned reforms and a new advertising service, dubbed Panama, to challenge Google in the increasingly important Web search and pay-per-click advertising markets.

"A year has gone by, and the competitive situation has not improved," Ballmer wrote to Yahoo's board last Thursday.

Under Semel, managing at Sunnyvale, California-based Yahoo became ever more unwieldy as major operations, each with its own industry culture, grew up in Silicon Valley, New York, Los Angeles and in a variety of joint venture operations in Asia.

A leaked Yahoo internal memo in November 2006 called for a dramatic organizational shakeup and layoffs of up to 20 percent of the workforce to restore competitiveness.

Known as the "Peanut Butter Manifesto," the memo argued that Yahoo was spreading organizational resources too thinly. "I hate peanut butter," memo author Brad Garlinghouse wrote.

Repeated product delays, business restructurings and executive defections, including former Chief Operating Officer Dan Rosensweig and research head Zod Nazen, led Semel himself to resign as CEO in June, when he was replaced by Yang.

No turnaround in sight

Since then, Yahoo has been slow to deliver on new strategies even as it recently warned of mounting economic headwinds in its advertising business. Last week, it said it would soon cut 1,000 jobs, or 7 percent of its workforce.

Plans to build a new type of hybrid media empire, developing programming exclusively for the Web, have not lived up to expectations and the Santa Monica, California studio operation is now a shadow of its former self.

In July, Yang declared there were "no sacred cows" as he promised to deliver a 100-day plan of action. Over the past year, it has shut down businesses such as its auctions and an older photos site.

But fundamental changes have come slow, American Technology Research analyst Rob Sanderson commented last month, making investors skeptical about Yang's leadership of a turnaround.

Last Thursday, Semel resigned as Yahoo chairman, the same day Ballmer notified Yang of Microsoft's impending bid plan.

Microsoft argues that what Yahoo and its own Internet operations require is scale -- sufficient size needed to compete with Google in Web search and online advertising and whatever yet-to-be-discovered Internet businesses pop up next.

"Neither company by itself really seems to pose an effective threat to Google," RBC Capital analyst Jordan Rohan said. "A combined Yahoo-Microsoft would still have to fix that."

Executives of the world's largest software maker say that only by joining forces can the two companies have sufficient resources to lead the market for corporate brand advertising while continuing to invest in data centers necessary to run Web services and attack emerging markets like video and mobile.

The biggest unanswered question is how far a unified challenge by Microsoft and Yahoo can alter Google's growing dominance of Web search and marketing. Microsoft's own Internet operations have not turned a profit in two years and its own long-anticipated search system failed to dent Google gains.

"Yahoo needs to reinvent the 'cool factor.' (But) you can't just do that because you want to," Global Crown Capital analyst Martin Pyykkonen said, adding that the same holds true for Microsoft: "(It) can't hold a board meeting and tell people to go back to their desks and start acting cool," he said.