Does Carol Bartz Have What Yahoo Needs?

CAROL BARTZ COULD BE YAHOO!'S last, best hope.

After her two predecessors failed in recent years to counter Google 's conquest of Yahoo! 's once-dominant position in Internet search, or to win over investors, new CEO Bartz brings strong software-engineering and management skills to the job. At her previous post atop Autodesk , she remade the business, sharply boosting margins, earnings and revenues and increasing the share price nearly tenfold.

Bartz, 60, is a sharp operator with a sharp tongue. She's famous for dropping the f-word during conference calls with analysts and investors. (She brought down the house at a recent conference with her opening: "Do you want me to say something naughty now?") More important, however, her first major initiatives at Yahoo! suggest where she's headed. She's recruited Timothy Morse, a proven cost-cutter from chip designer Altera, as her chief financial officer. That followed Bartz's slashing Yahoo!'s workforce by about 675 people, or 5%, in April. Coupled with the 1,450 jobs eliminated just before her arrival in January, the total reductions could save $400 million or more a year, by one estimate.

Although she declined to speak one-on-one with Barron's and isn't expected to detail her strategy until her first analyst session in the fall, Bartz is likely to try to improve Yahoo!'s operating efficiency and profitability.

Says John Chambers, chief executive of Cisco Systems, who's known Bartz for about 15 years (she's a member of his board): "She is remarkably direct. She listens and brings an ability to outline a vision and instills confidence and trust and a sense of the future." Chambers recommended her for the spot. "She has a tough hand to play out [at Yahoo!], and if I were to bet on a person to play that hand it would be Carol. She always gets results," he says.

If she does play her hand right, Yahoo! (YHOO: 15.45, +0.77, +5.24%) will be a more tightly focused, profitable and faster-growing business that can either go it alone or sell itself, most likely to previous suitor Microsoft (MSFT: 23.47, +0.13, +0.55%), which has lagged behind both Google (GOOG: 409.29, +3.61, +0.88%) and Yahoo! in its Internet search business.

For investors willing to put down an early bet, Yahoo! shares are cheap. They have the lowest multiple among their large-capitalization peers. The company's enterprise value (market value plus debt) is just 5.7 times its 2009 Ebitda (earnings before interest, taxes, depreciation and amortization), compared with Google at 10.9 times and Amazon (AMZN) at 20.6 times. Citicorp analyst Mark Mahaney, who upgraded his rating of Yahoo! to Buy last week, thinks the shares are worth 21 each, versus 15.61 now, a 35% premium.

As Chambers suggests, Bartz has been dealt a tough hand. Yahoo! has steadily lost market share to Google, whose model of so-called paid search -- or sponsored links to Websites that appear when users type words in the search engine -- has outstripped Yahoo!'s, which relies more on banner ads and video. Repeated attempts to change this operating model haven't helped much.

In February of last year, Microsoft offered 31 a share and later reportedly raised the bid to 33. Yahoo! co-founder and CEO Jerry Yang and his board rejected the bids. That, coupled with the stock market's swoon and Google's continued strength, took the stock down below 10 in November 2008. At about the same time, sharp-elbowed shareholder-activist Carl Icahn started buying shares and began to pressure the company to do something about the stock price.

Yahoo! reported 2008 earnings of $424.3 million, or 29 cents a share, down from $660 million, or 47 cents a share, a year earlier. Last year's revenue hit $7.2 billion, up from $6.97 billion. Analysts expect Yahoo! to earn $498 million in 2009, or 35 cents a share on revenues of about $4.73 billion. Amid all this, Internet advertising has gone very soft as key markets -- such as automotive, financial and real estate -- got hammered. Yahoo! posted a $303.4 million loss in the December quarter of 2008 on revenues of $1.8 billion.

The Street will learn more about Yahoo!'s financial state this Thursday, when Bartz oversees her first annual meeting.