Memo To Loeb: You Broke Yahoo -- 5 Ideas to Fix It

To: Dan Loeb, principal of Third Point Capital, director-elect of Yahoo (Nasdaq: YHOO), the No. 3 search engine and owner of about $1.1 billion of Yahoo shares --

Congratulations, the good guys finally won. You and your team, with help from other institutions, have ousted CEO Scott Thompson, elected three Third Point nominees to the board, removed another handful of management nominees and effectively control the company.

Now what?

How does Yahoo, in Sunnyvale, Calif., become No. 1 in search and media company again? Here are five suggestions:

Make Yahoo cool again. Everybody's first search engine back when Jerry Yang and David Filo dreamed up the company, Yahoo was cool, fun and had a sense of humor. Even now the home page is interesting and there's Yahoo Mail, Yahoo Finance and Yahoo Sports, which several million people are checking right now.

By contrast, Google (Nasdaq: GOOG), the No. 1 search engine, isn't cool but austere, effective and efficient. But it's also under scrutiny from federal and European Union regulators and could encounter major problems. You can restore this damaged brand.

Work better with Microsoft. If you can't beat 'em join 'em is the old motto. Under CEO Carol Bartz, Yahoo outsourced certain technical and administrative functions for Yahoo search to Microsoft (Nasdaq: MSFT) whose Bing is now No. 2 in search, followed by Yahoo.

Surely there's way to make things work here, for advertising and other things, especially as Google tries to boost the Android OS for mobile platforms. Microsoft, after all, is in the pre-launch phase of Windows 8, adopted already by Nokia (NYSE: NOK).

Could Yahoo be the default browser on new Windows phones?

Be scrupulous in all filings. One of the weak points of the ill-fated tenure of Thompson was resume embellishments by him and former director Patti Hart, CEO of Interactive Gaming Technologies (NYSE: IGT).

At Third Point, easier Google searches quickly pointed out the discrepancies between Thompson's other board memberships at Splunk (Nasdaq: SPLK) and F5 Networks (Nasdaq: FFFV). Then an easy phone call to the university registrar sealed the fate for him and Hart.

Let's be 100 percent sure credentials for interim CEO Ross Levinsohn, 48, and all the new directors are accurate. Yahoo, is after all, search engine that delivers accurate results, right?

Figure out Yahoo's Asian connections. From the start, Yahoo enjoyed financial backing from Japan's SoftBank (Pink: SFTBF), the vehicle of Masayoshi Son, the Korean Japanese tycoon. Yahoo still holds about 35 percent of Yahoo Japan (Tokyo: 4689) as well as about 40 percent of China's Alibaba Group (Pink: ALBCF).

Third Point knows these holdings are potentially worth more than Yahoo itself. Management under retiring chairman Roy Bostock hired Goldman Sachs & Co. (NYSE: GS) and Allen & Co. to provide strategic advice.

Now's the time to figure out how to unlock the value in both holdings. For sure, Yahoo ought to remain in the booming China market. Alibaba's CEO Jack Ma said he wanted to buy all of Yahoo, so a deal could be arranged to sell a piece to him.

Be creative. Yahoo was always a marriage between a couple of Stanford University computer jocks, media and advertising people. The early Yahoo ran very well. Then bad management by Terry Semel, a former Hollywood mogul, Yang and Carol Bartz the former CEO of Autodesk (Nasdaq: ADSK) got it into trouble.

With cash and investments exceeding $2.2 billion and market capitalization around $19 billion, surely a rebuilding Yahoo can attract the right mix for a turnaround. The shares have already gained 3 percent in the first session after your deal was announced,

Up to you, Mr. Loeb.