Yahoo's (YHOO) CEO in Hot Water Over Falsified Credentials

Last week, Yahoo (YHOO: Charts, News) dominated business headlines for all the wrong reasons. CEO Scott Thompson's fabricated resume was exposed by a disgruntled shareholder, its patent battle with Facebook backfired spectacularly, and Chinese Internet giant Alibaba inched closer to declaring independence by buying back its shares from Yahoo.

Will these three recent developments force investors to rethink the future of Yahoo, whose shares have slid 17% over the past year? Daily Chart
Thompson's embarrassing fabrication, in which he added a non-existent computer science degree to his actual accounting degree, has cast a long shadow over his positive progress as CEO. The revelation was unearthed by hedge fund manager Daniel Loeb, whose fund Third Point owns a 5.8% stake in Yahoo. The false information has been on Thompson's resume since his days at eBay's (EBAY: Charts, News) PayPal, where he formerly served as chief technology officer and president. Despite lacking a computer science degree, Thompson oversaw the growth and success of PayPal, as well as Visa's (V: Charts, News) credit and debit processing systems, prior to taking over Yahoo's top post from the deeply unpopular Carol Bartz. Although Yahoo has claimed that the mistake was an "inadvertent error", Loeb has cited the incident as an ethics violation symptomatic of "poor corporate governance" at the company. "Now more than ever Yahoo investors need a trustworthy CEO," Loeb stated. Loeb is notably in the midst of a battle to oust Yahoo's current board of directors, and convince shareholders to elect himself and his allies to the board at the next shareholder meeting. Since becoming CEO, 54-year old Thompson laid off 14% of his workforce, or 2,000 employees, in order to cut costs. He also shut down 50 non-performing Yahoo services. His efforts resulted in Yahoo's first year-over-year increase in quarterly revenue since 2008. However, Thompson's attack on Facebook, in which he sued the social media giant for allegedly infringing on ten of Yahoo's social services patents, has been harshly criticized by shareholders. Yahoo has traditionally used patents for defensive, rather than offensive purposes. This resulted in Facebook counter-suing Yahoo with ten of its own patents. Facebook was assisted by Microsoft (MSFT: Charts, News), which sold the company most of its social media patents acquired from America Online (AOL: Charts, News). Facebook also recently acquired hundreds of patents from IBM (IBM: Charts, News), which are mostly related to data center operations. Both acquisitions give Facebook the firepower to fight back and lock Yahoo into costly litigation that will impact its fragile bottom line. Lastly, Yahoo's messy divorce from Chinese e-commerce giant Alibaba may nearly be final. Alibaba was once Yahoo's important partner in China, until CEO Jack Ma spun off its profitable Alipay website into a separate company to keep it out of Yahoo's hands. Since then, Alibaba has fought to repurchase the 40% of shares held by Yahoo, an offer sternly rejected by Carol Bartz, who saw the partnership as one of the company's few sources of growth. The deal, worth $10 billion, is now back on the table as Thompson's Yahoo considers the Alibaba debacle a "distraction" from its core U.S. business. Yahoo could also benefit greatly from a cash injection of $10 billion, which could give it stronger resources to shore up its defenses against Google (GOOG: Charts, News). Despite slumping for most of the year, shares of Yahoo trade at 14 times forward earnings, with a 5-year PEG ratio of 1.3. If Thompson can stay at the helm long enough to continue enacting his aggressive cost reductions, Yahoo stock may just be able to bounce back as a leaner, more profitable company. Other News About YHOO Yahoo confirms misleading info on new CEO's resume Yahoo's CEO gets hit with a falsified resume. Alibaba Closing in on Yahoo Buyback Alibaba moves closer to independence. Other Stocks in the News Papa John's sales, store openings rise Papa John's posts impressive earnings. Dolby Soars After Being Picked to Provide Windows 8 Audio Dolby is picked as the voice of Windows 8, shares rally. Copyright 2012 by InvestorGuide.com, Inc. 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Published on May 7, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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