Technology

SUNNYVALE (CBS 5 / KCBS / AP) ― Hundreds of Yahoo employees were informed they would lose their jobs on Wednesday in the first wave of 1,500 cuts that a company spokesman said would continue through the end of the year.

Yahoo is cutting 10 percent of its workforce as part of an overall plan to trim $400 million to shore up the company's finances.

The company also might close some of its unprofitable products during the next few weeks and shift other, less popular services into "maintenance mode," spokesman Brad Williams.

The layoffs come as one of Yahoo Inc.'s largest shareholders, Ivory Investment Management LP, urged the Internet company to sell its search unit to Microsoft.

In a letter sent Wednesday to Yahoo's board, Ivory called upon the directors to make amends for "acting unreasonably" in their earlier talks with Microsoft by quickly closing a deal with the software maker now. It accused the company of ignoring shareholder interests.

"We have regrettably watched the company not only miss-execute operationally, but also mishandle, in our opinion, a bona fide offer from Microsoft to acquire the entire company for $31 per share," the letter said.

Ivory Investment, which owns a 1.5 percent stake in Yahoo or 21.4 million shares, reasoned the Sunnyvale-based company could persuade Microsoft to pay $15 billion for its search operations and still emerge with more earning power than it currently has.

The net result: Yahoo could nearly double its current stock price to at least $24, based on the financial assumptions made in Ivory's analysis.

Some of Ivory's math is debatable, but there is little doubt left on Wall Street that a search deal with Microsoft now appears to be Yahoo's best bet, said Stanford Group analyst Clayton Moran.

"It's a very reasonable question for Yahoo shareholders be asking right now: why the company isn't talking to Microsoft right now," Moran said. "The pressure should be mounting for them to talk because there is no good explanation for them not to be doing so at this point."

Investors reacted as if Ivory's cajoling will help bring Yahoo and Microsoft back to the bargaining table. Yahoo shares surged $1.21, or 10 percent, to close at $13.40 while Microsoft shares rose 1 cent to $20.61.

Williams declined to comment on Ivory's letter.

Redmond, Wash.-based Microsoft didn't immediately respond to a request for comment, but Chief Executive Steve Ballmer reiterated last week that he remains interested in exploring a search deal with Yahoo as he tries to come up with a way to undercut Google Inc.'s dominance of the online advertising market.

Although it trails Google by a wide margin, Yahoo's search engine is the Internet's second most popular, with a U.S. market share of about 20 percent, according to comScore Inc. Microsoft's search engine ranks third at 8.5 percent.

Ballmer has maintained that Microsoft no longer is willing to buy Yahoo in its entirety - an option that was pulled off the table seven months ago when Ballmer withdrew a takeover offer of $47.5 billion, or $33 per share. Yahoo CEO Jerry Yang was holding out for $37 per share.

With Yahoo's stock in the doldrums, other shareholders besides Ivory Investment already have been lobbying for the company to reconcile with Microsoft.

Yahoo director Carl Icahn, who owns 5.5 percent of the company, has been leading the charge, and others, like Mithras Capital, also have thrown their support behind a Microsoft deal.

Last month, Yang said he is ready to talk if Microsoft wants. He made the comments shortly after Google scrapped a planned advertising partnership that Yang had been counting on to boost Yahoo's revenue by as much as $800 million annually.

Yahoo is now searching for a new CEO to replace Yang, who co-founded the company 13 years ago.

Yahoo also has been talking to Time Warner Inc. about a possible purchase of AOL - an idea that Ivory Investment adamantly opposed in its letter.

Ivory Investment, a hedge fund run by Curtis Macnguyen, devoted most of its letter to a detailed breakdown attempting to justify why a $15 billion sale of Yahoo's search engine to Microsoft would pay off for both sides.

The firm estimates Yahoo would lose more than $2 billion of annual revenue from the sale but would gain about $1.6 billion a year in commissions. The analysis assumes Microsoft would be able to leverage the additional search market share it would pick up from Yahoo to boost its Internet revenue by about $1 billion annually.

In the letter Wednesday, Ivory also pointed out the rising threat to both Microsoft and Yahoo from the Internet search leader, Google Inc.

"It is widely acknowledged that neither company has kept pace with Google's innovation and investment spending," the letter said. "As a result, both companies appear to have fallen further behind in a business area they have each repeatedly referred to as a top priority."

Ivory said Microsoft's purchase of Yahoo's search engine would help drive up the number of queries in the company's overall search network, thereby spurring more revenue.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)