Yahoo! Suffering From Brain Drain

Top executives are fleeing the company.
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SAN FRANCISCO - With a steady stream of high-level employees walking out the door,

Yahoo!

(YHOO)

is grappling with a future that will rely less on the past.

Ever since merger talks with

Microsoft

(MSFT) - Get Report

broke down and the prospect of an alternative deal waned, the tech giant has seen some of its top talent leave. They include Jeff Weiner, executive vice president of Yahoo!'s network division; Qi Lu, executive vice president for the search and advertising technology group; and Stewart Butterfield and Caterina Fake, the co-founders of photo-sharing site Flickr, according to media reports.

Yahoo! wouldn't confirm all of the departures but issued a statement saying that it "continues to be a leader in our industry and remains a unique, exciting, and important place to work even as we experience the attrition that's to be expected in the Internet industry."

Cantor Fitzgerald analyst Derek Brown says the departures spell bad news for Yahoo!.

"As an outsider who has watched the company for a long time, it feels as if a number of key employees are at the end of their rope in terms their expectations for the company and the direction it seems to be headed," Brown says. "The fact that they all seem to coincide with a (failed) deal with Microsoft and a simultaneous deal with

Google

(GOOG) - Get Report

is no coincidence."

Last Thursday, Yahoo! revealed that discussions to sell its search business to Microsoft were dead. At the same time, the company announced that it was outsourcing some of its search ads in the U.S. and Canada to Google. Yahoo!'s stock plummeted 10% on the news and has yet to regain its value since.

Shares of Yahoo! closed down 74 cents, or 3.2%, or 72 cents, to $21.99.

While it is unclear whether these same departing executives would have stuck around in the event of a merger with Microsoft, Yahoo! must still come to terms with the fact that it is facing an uncertain future without them.

"The core issues that Yahoo! faces in marketplace has not changed and that excludes any internal turmoil by management's attention being diverted by Microsoft," Brown says.

Trip Chowdhry, an analyst for Global Equities Research, says Yahoo! might actually benefit from the departures if it is able to replace what he calls "dead wood" with fresh blood, assuming that the company can attract new recruits.

"They are eliminating the people who may not be prime contributors to Yahoo! -- it's a healthy sign," he says. "They are sorting out the good apples from the bad."

And even if Yahoo! loses some people it may have wanted to keep, Chowdhry still maintains the company can do well. It will just take time.

"This is a two-year journey, not a two-week journey, or a two-month journey or a two-quarter journey," he says.