After working in Silicon Valley for 15 years, I developed this theory called “The Myth of Empowerment.” While the Myth of Empowerment wasn’t intended to act as a qualitative indicator for stock picking, it turns out that it could easily be applied to the decline of Yahoo (Nasdaq:YHOO) – with the fallout inflicting damage on Microsoft (Nasdaq:MSFT).

The one thing you notice about Silicon Valley is the meetings. They multiply like a fungus. Once inside, you become intoxicated from the heady fumes of whiteboard markers, since the entire culture seems incapable of explaining anything without standing in front of the room to draw organizational charts. Ditto for PowerPoint.

And so the Myth of Empowerment came into being after years of sitting in conference rooms listening to these pretentious windbags. As the Myth of Empowerment goes: The more computing power you give to incompetent people, their incompetence rises commensurate with their reliance on that computing power.

Of course, now that computers are becoming more powerful more quickly, the rise to incompetence is meteoric in some organizations.

It seems that as an analytical tool, The Myth of Empowerment could have predicted why the bottom fell out of Yahoo’s stock price long before the current economic malaise.

Reporter Om Malik, writing for Fortune online, nailed the Yahoo culture in his piece of Nov. 17th. This excerpt could have come directly out of the text of The Myth of Empowerment.

“What hasn’t been discussed is that the company isn’t really facing up to the fact that its layers of management have resulted in a state of masterful inactivity, masked perhaps as a culture of consensus. This starts at the top – from the company’s board and senior management down to VP level where people are prone to organizing and attending twenty meetings before deciding the fate of a project. Some senior managers including the ones who are deserting the company are skillful players in this game of hiding ennui behind grandiose plans and a great future that never happens.”

Malik’s observation was part of a story he wrote regarding the resignation of current CEO and Yahoo Founder, Jerry Yang. This is the guy, along with his board, who fought off a bid by Microsoft earlier this year at $31 per share, because they believed the price undervalued the company. Today, Yahoo is at $11.67.

After he resigns as CEO, Yang will remain on the board and take on the title of Chief Yahoo (seriously) as the company seeks a replacement.

Given the current shortage of cash in the market, everyone now expects Microsoft to make another pass at Yahoo for the lack of other potential suitors. In fact, some wags conjecture that the #1 job of the new Yahoo CEO will be to broker a Microsoft deal.

The someone else part, however, gets real tricky. Private equity has just reached a stand-still. There may have been a Chinese taker earlier in the year, but that market is also under siege. And if the Yahoo board thinks that AOL is a bailout scenario, then more power to them.

A Google deal may have been possible at one point, but the Feds were already making noise that they would kill a prospective alignment with Yahoo as part of joint-marketing and technology-sharing agreement that got shelved in reaction to hostile Feds. And that wasn’t even a full-blown merger.

In the end, it all comes back to Microsoft. Over the past two days, Microsoft’s shares have slipped 9%. This is consistent with the long-term trend of the stock’s price surrounding a takeover of Yahoo.

Whether or not Microsoft approaches Yahoo again largely depends on Yang’s successor. Our expectation is that if Microsoft does manage to buy Yahoo, Microsoft shares will drop. If word leaks of a Microsoft-Yahoo merger, Microsoft will drop. And until the fate of Yahoo becomes definitive, Microsoft shares will continue to drop.

Last 5 posts by Irwin Greenstein

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