After Microsoft withdrew its $33-a-share offer for Yahoo on Saturday, the question was how far Yahoo’s stock would drop. On Monday morning, the markets gave an initial answer: plenty.

Shortly after 10 a.m., Yahoo’s shares were off nearly 20%, at $23.92, down from the close of $28.67 on Friday — a day when the companies were said to be escalating their talks on a merger.

Microsoft’s own shares edged up slightly, to $30, from their Friday close of $29.24. And shares of Google — a rival of both companies but now a potential partner of Yahoo — were up about 2%, trading around $595.

How long Yahoo’s stock will stay down will largely depend on the company’s next moves. And its successful resistance to Microsoft’s pursuit set up a clear challenge for Yahoo’s chief executive, Jerry Yang: prove to investors that the company is worth $37 a share, the price he was willing to sell it for.

People close to Yahoo said that Mr. Yang and his team greeted Microsoft’s decision as a victory. High-fives were exchanged Saturday afternoon when they learned Microsoft was backing down.

Yet some Yahoo shareholders, large and small, have indicated that they favored a deal at around $34 to $35 a share. Even those who were holding out for a higher price said a merger with Microsoft made strategic sense.

“I don’t believe that Jerry Yang as a founder, as someone who is emotionally attached to the company, was really looking out for my interest as a shareholder,” said Darren Chervitz, co-manager of the Jacob Internet Fund, which owns about 150,000 shares of Yahoo. “I don’t think anything Yahoo puts out there is going to be comparable with what Microsoft was offering.”

The entire board backed Mr. Yang’s desire to reject Microsoft’s offer, said a person involved in the negotiations who was not authorized to speak publicly about the matter. But unhappiness with Mr. Yang could spread through the company’s ranks.

“If the stock drops as far as I think it will, a lot of employees are going to be angry and many key employees could leave,” said a Yahoo executive, who asked to remain anonymous to avoid upsetting his superiors.

On Jan. 31, just before Microsoft’s uninvited bid for Yahoo became public, Yahoo closed at $19.18, near a four-year low.

Yahoo defended its decision, saying it had always thought Microsoft’s offer, worth about $47.5 billion, undervalued the company. Officially, the company has shed little light on what it might do next. “We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets,” Roy Bostock, Yahoo’s chairman, said in a statement issued late Saturday.

But people close to the company suggested that Yahoo’s most likely lifeline could come from an unlikely source: Google.

The two companies recently conducted a two-week test in which Google delivered ads on a small portion of Yahoo searches. The test, which both companies described as successful, was intended to show how much more Yahoo could earn by outsourcing some of its search ads to Google, whose technology and large base of advertisers allow it to extract more revenue on average for every search.

Now Google and Yahoo will have to decide whether to move from test to broader partnership. Talks around a deal were active Friday, even as Yahoo and Microsoft were engaged in a last-ditch effort to come to an agreement, said a person familiar with the discussions.

For Yahoo, the idea of letting Google run some of its search ads is not new. Some shareholders and even some Yahoo executives have long favored it. By the company’s own reckoning, Google earns about 60 percent to 70 percent more on average for every search than Yahoo.

But before Microsoft made its offer, Mr. Yang and his team had repeatedly rejected the idea, saying search advertising was an essential part of the company’s long-term strategy. Instead, the company spent millions in improving its own search advertising system, called Panama, telling investors it was the right choice.

In a letter sent Saturday to Mr. Yang, Steven A. Ballmer, Microsoft’s chief executive, used precisely those arguments to emphasize why a search advertising partnership with Google was a bad idea. He also noted that it was one reason Microsoft decided to walk away from its offer, rather than initiate a proxy fight.

By MIGUEL HELFT, The New York Times
Published: May 5, 2008