Yahoo faced growing pressure on Sunday to find an alternative strategy to Microsoft's $47.5 billion takeover offer after the software maker walked away over a disagreement on price.
Yahoo shares could fall by more than 30 percent on Monday over the breakdown of talks, but that drop could be softened if Wall Street believes Yahoo Chief Executive Jerry Yang has another strategy up his sleeve, analysts said.
Yahoo is likely to push for an advertising partnership with Web search leader Google, sources familiar with the matter said. A tie-up with Google, seen as a big winner from the end of Microsoft-Yahoo talks, should help boost Yahoo's operating performance in the near term.
"It's time to get a move on with Google," said Jeffrey Lindsay, analyst with Sanford C. Bernstein. "Let's hope they weren't bluffing."
Yahoo is also still considering a deal with another Internet media and advertising major, such as Time Warner's AOL, people familiar with the discussions said.
But Yang and the company he helped create could face a flood of shareholder lawsuits or other actions if nothing materializes.
"There are two things that could support the stock: the potential for Microsoft to return and the potential to do a Google deal," said Clayton Moran, analyst at Stanford Group.
Moran said Yahoo shares could fall to the mid- to low-$20 range on Monday from their $28.67 close last week. Other analysts said it could slip closer to $19.18, where it closed on January 31, a day before Microsoft made its offer public.
Microsoft shares are likely to rise on Monday, with its investors relieved that Chief Executive Steve Ballmer didn't shell out billions more for Yahoo, analysts said.
Microsoft on Saturday sweetened its initial $31-per-share offer for Yahoo to $33, but then withdrew from the talks when Yang dug in for a price of $37.
Yang maintains that even the higher offer did not value Yahoo properly for its investment in search technology, its prominence in online display advertising and other assets. On Sunday, he sought to shore up that sentiment among employees.
"We have a spirit and a culture that is uniquely Yahoo," Yang said in an email to staff. "Staying true to who we are has helped us pull through the recent uncertainty we've faced."