With Jerry Yang stepping down from the top position at

Yahoo!

(YHOO)

, many expect the path is now clear for

Microsoft

(MSFT) - Get Report

to swoop back in with a bid to acquire the ailing Internet search giant.

Some industry observers argue, however, that Yahoo! can remain a stand-alone business, and even succeed, if it were to stop entertaining thoughts of a buyout and instead come to an agreement with Microsoft on a paid-search deal.

Gene Munster, an analyst with Piper Jaffray, said in a research note to clients Tuesday that whomever Yahoo!'s board selects as a replacement for Yang will indicate whether the company has plans of either continuing to compete on its own or looking for a new acquisition or partnership agreement.

"Specifically, we believe the appointment of a well-known industry veteran with a solid track record would signify the intention to continue competing under its own control," Munster writes. "In this scenario, we believe that Yahoo! would likely continue to explore search outsource deals if they make financial sense to the company, but would also focus on strengthening its core display assets."

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Earlier this year, Microsoft offered to buy Yahoo! for $33 a share, an offer that Yang famously said substantially undervalued Yahoo!'s assets. But Yang has had a hard time letting go of the topic, saying earlier this month that "the best thing for Microsoft to do is to buy Yahoo."

Of course, since Microsoft's initial bid fell apart, shares of Yahoo! have dropped precipitously.

Instead of broaching the subject of a new buyout deal, some analysts say that the first move the new Yahoo! CEO should make is to approach Microsoft on a paid-search alliance, similar to the scuttled pact

Google

(GOOG) - Get Report

and Yahoo! attempted earlier this year.

The Google and Yahoo! partnership, first announced in June, would have allowed Yahoo! to display search ads sold by Google and take a cut of the revenue. However, the Justice Department requested a meeting to discuss the pact amid criticism a deal would give Google too much clout in online advertisements.

"

Yahoo! would do a deal very similar to the one proposed by Google, albeit with probably more exacting terms," says Sanford Bernstein analyst Jeffrey Lindsay. "Essentially, Yahoo!'s paid-search business would be outsourced to Microsoft. That would give Microsoft the incremental share it's looking for to build its business."

In such a deal, Yahoo! would look to gain from Microsoft exactly what had been proposed under a deal with Google. Yahoo! had estimated the search deal would result in about $250 million to $450 million in incremental operating cash flow in its first year, with the potential to generate about $800 million in annual revenue.

"I don't think a Yahoo! and Microsoft transaction draws nearly the level of scrutiny that anything with Google does," says Chris Boova, an investment officer at J. & W. Seligman. "I think that would pass muster. I'm not sure that given the relative positions of Microsoft and Yahoo! that it would be nearly as beneficial. It doesn't accomplish quite the same."

If Yahoo! were to choose that course of action, Yang's replacement as CEO would also have to manage the very troubled display ad business. Yahoo! has actually seen strength in revenue from search ads, which climbed 17% in the third quarter. That compared with only a 3% growth in its display ads, with particular weakness in the premium business, where advertisers are scaling back as a result of the economic downturn.

"Paid search is the jewel in the crown and is holding up, relatively speaking," says Lindsay. "Display was impacted by the downturn first, so a new CEO would have to deal with that as well as large and extensive cost cutting and reorganization of the business."

Boova says that a paid-search deal between Microsoft and Yahoo! is "incrementally positive" but that it doesn't address the core issue. "To stand alone, Yahoo! must continue to make strides in their ability to sustain display advertising," he says. "Part of that is a decline in advertising spending in general."

Yahoo! has already enacted cost-cutting measures when it slashed its

workforce

by 10% last month. The company said it would cut more than 1,500 positions from its global staff by the end of 2008, which should result in a savings of $400 million.

Lindsay says $400 million is not enough and that Yahoo! will have to continue to lighten its load if it hopes to continue under its own control. "Unfortunately, that means it has to cut its cost base. Lack of profitability will eat into its cash reserves and that will lose its ability to make strategic acquisitions and take advantage of buying opportunities when the market turns around," he says.

As Yahoo! has said its search for a new CEO will "encompass both internal and external candidates," Lindsay says a likely candidate for the job is Jonathan Miller, the former head of

America Online

who took over the reins of the stumbling Internet provider in 2002. If Yahoo! does indeed hope for a turnaround, Lindsay says that Miller would be the best choice as he has already proven he can fix broken Internet companies.

"

Miller has experience in managing a very troubled business and changing strategy in a very similar downturn," Lindsay says. "He's one of the few Internet CEOs out there who has actually turned an Internet business around."

If the company were to promote someone from within the company Munster says that would "likely signify the intention to partner or be acquired as the future vision for the company."

Possible internal successors as CEO include Yahoo! President Susan Decker, according to several reports. Shares of the company jumped nearly 13% during Tuesday's session to $12.

During the past year, Yahoo! has traded between $9.76 and $30.25. At the time of Microsoft's acquisition offer, Yahoo! was trading slightly above $19.