Yahoo!, one of the internet's most popular destination sites, last night heaped further misery on the beleaguered dot.com sector by warning that its profits would be lower than expected and that its chief executive was stepping down.
The Silicon Valley-based firm became the latest in a long line of internet and media companies to blame a weakening advertising market for its shortfall in revenues.
Its downbeat statement is likely to have a knock-on effect on shares in UK internet companies when they reopen for trading this morning.
Yahoo!, which was once one of the internet's brightest stars, has come to symbolise the malaise that has gripped the sector in recent months as its stock market value has tumbled from more than $100bn to around $11bn today.
A year ago dozens of dot.com companies were commanding multibillion-pound valuations even though they lacked revenues, profits and dividends.
Investors were betting on the young companies revolutionising the way business was conducted but in many cases sales have failed to filter through as planned and financiers have reverted to backing more mundane but stable companies. Analysts believe that the instability at Yahoo! could lead to it being swallowed up by a more traditional media company. Vivendi Universal, Disney, Viacom and Rupert Murdoch's News Corporation have all been mentioned as possible bidders.
Tim Koogle, chief executive of Yahoo!, who has nurtured the site from shortly after it was founded and is known to staff as TK, will stay on as chairman during what is likely to be a turbulent trading period. Headhunters have been appointed to find his replacement but industry watchers warned it could be a difficult process.
John Corcoran, an analyst with CIBC World Markets Corp, likened finding a replacement to "getting someone to step in front of an avalanche".
Analysts said Yahoo! had fallen victim to its dependence on advertising revenues and its failure to generate cash from other areas.
Several big firms in the US say they are concerned by the slowing growth of the economy and plan to spend less on advertising than they did last year, when the presidential election and Olympics helped expenditure reach heady levels.
Yahoo! itself generated record revenues of more than $1bn last year. But 90% of its revenues come from advertising and last night it said it expected to miss its earnings forecast by about 20% due to the slowdown. It now expects to "approximately break even" in the first quarter - well below what most Wall Street analysts were hoping for.
Rumours of problems at Yahoo! began to emerge yesterday morning when a senior executive unexpectedly cancelled a speech at a high-profile conference organised by the investment bank Merrill Lynch in the US. Dealers started to speculate that the company had run into financial difficulties or was about to be taken over and trading in the shares was suspended shortly after they had fallen to their lowest level since autumn 1998.
Yahoo! has been hit by several management changes recently. Last month Fabiola Arredondo, chief executive of Yahoo! Europe, quit to pursue "private business interests".
Mr Koogle said last night: "All businesses in the United States are facing challenging economic conditions that have weakened further in recent weeks, and as consumer confidence and spending has deteriorated, a broad range of customers have delayed their spending across all media formats until their economic outlook improves."
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