Yahoo!: 99 Problems But the Board's The Big One

NEW YORK ( TheStreet) -Hopes were high for a Yahoo! ( YHOO) turnaround when Scott Thompson became CEO and Roy Bostock announced he would no longer be Chairman of the Board. Those hopes, however, are dimming as a proxy battle looms on the horizon.

Yahoo! appointed three members to its board on Sunday, just days after largest shareholder Third Point, run by Daniel Loeb, attempted to clinch four seats on the company's board.

In addition to himself, Loeb wanted to add Harry Wilson, Michael Wolf and Jeff Zucker, formerly of NBC Universal, to the board. Yahoo! said 'thanks, but no thanks.'

Inevitably, Loeb isn't happy about Yahoo!'s decision, and now a proxy battle's brewing. This hardly spells good news for a Yahoo! turnaround, according to Sanford Bernstein analyst Carlos Kirjner.

"The potential for a proxy battle with activist investors led by Third Point seems to have increased over the last several weeks," he wrote, in a recent note, citing a proxy battle as one of Yahoo!'s major problems. "The risk is that such confrontation would consume important time from the senior management team and lead to bad strategic decisions or poor execution," Kirjner wrote.

Third Point also made this point in its press release on Sunday. "Sadly for shareholders - who will once more bear the costs - the consequence of the Board's refusal to accept Third Point's shareholder-friendly proposals will be a time-consuming and distracting proxy contest that the Company can ill-afford," it said. Loeb, who has never been known to mince words, referred to the board as "dysfunctional."

When Scott Thompson, formerly of PayPal, was announced as CEO, and the embattled Bostock decided he would not seek re-election, there was optimism that the company would get back on track.

With Yahoo! still trying to figure out how to unlock the value of its Asian assets, however, the clock is ticking for Thompson to announce his plans for the firm. "The 'honeymoon' period is either over or about to be over and Yahoo! will soon be compelled to disclose details of its new strategy," explained Sanford Bernstein's Kirjner.

The analyst rates Yahoo! "market perform" with a $17 price target.

On Sunday Yahoo! announced it would be adding three new directors to its board. John D. Hayes, Executive Vice President and Chief Marketing Officer of American Express ( AXP), Peter Liguori, former COO of Discovery Communications ( YHOO) and former Chairman and President of Entertainment at Fox Broadcasting Network, and Thomas J. McInerney, the outgoing CFO of IAC/InterActiveCorp ( IACI) are being added to the board.

Yahoo! claims that it wants to "maximize shareholder value," but a proxy fight risks further alienating shareholders. Over the past three months, shares of Yahoo! have lost 4.68% while, the Nasdaq has gained 19.21%.

Clearly investors, do not like the direction the company is taking.

Shares of Yahoo! dipped 2 cents, or 0.1%, to $15.37 in Monday trading.

Interested in more on Yahoo!? See TheStreet Ratings' report card for this stock.

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-- Written by Chris Ciaccia in New York

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