Late on Monday, Jerry Yang 40, who also happens to be the co-founder of Yahoo! (NASDAQ: YHOO), announced that he will step down as CEO as soon as a replacement is found. The announcement didn't came as a surprise to many as it was expected after Yang failed to strike a deal with Microsoft and Google.

Yang, stepped in as CEO of in June 2007 when the board asked him to restructure the web company, which has been fast losing its market share to rival Google (NASDAQ: GOOG).

In a statement Yang said "I will continue to focus on global strategy and to do everything I can to help Yahoo realize its full potential and enhance its leading culture of technology and product excellence and innovation.”

Yang will remain chief executive at Yahoo! while it searches for a replacement. "I will be participating in the search for my successor, and I will continue as CEO until the board selects a new CEO. Once a successor is named, I will return to my previous role as Chief Yahoo! and continue to serve as a director on the board," Yang added.

In his memo to employees, Yang said, “all of you know that I have always, and will always bleed purple. I will always do what I think is right for this great company. From founding this company to guiding its growth into a trusted global brand that is indispensable to millions of people, I have always sought to do what is best for our franchise," Yang said in a statement.

Chairman Roy Bostock said "Jerry and the board have had an ongoing dialogue about succession timing, and we all agree that now is the right time to make the transition to a new CEO who can take the company to the next level. The board will be evaluating and considering both internal and external candidates and has retained Heidrick & Struggles to help in this  effort.”

A few days back, Google Inc. (NASDAQ: GOOG) abandoned its proposed 10 year advertising partnership with Yahoo Inc. in order to avoid a showdown with US Department of Justice. In a statement Google said that the deal "risked not only a protracted legal battle but also damage to relationships with valued partners.”

Earlier this year, Microsoft (NASDAQ: MSFT) made an unsolicited takeover bid to buy Yahoo! for US$44.6 billion dollars in cash and stock.  However, on February 11, 2008, Yahoo! decided to reject Microsoft's offer as substantially undervaluing". On May 3, 2008, Microsoft walked away from offer. During a meeting between Ballmer and Yang, Microsoft had offered to raise its offer by $5 billion to $33 per share, three while Yang asked for $37. The stock is currently trading at around one third of what was being offered by Microsoft.

After the deal with Google collapsed, Yang said at a technology conference that he is quite "very open minded" about a merger with Microsoft Corp. "The best thing for Microsoft to do is to buy Yahoo.

However, Steve Ballmer, chief executive of Microsoft Corp. (NASDAQ: MSFT) said in a statement made it clear that he is no longer interested in acquisition of Yahoo. "We made an offer, we made another offer, and it was clear that Yahoo didn't want to sell the business to us and we moved on.

Jerry Yang found himself in trouble after billionaire investor Carl Icahn threatened a proxy fight, and investors withheld about a third of their votes for Yang's re-election to the board in August.

Some of the names doing the round as probable candidate for CEO's post  include News Corp. COO Peter Chernin, as well as former AOL head Jon Miller, former eBay CEO Meg Whitman and former Yahoo COO Dan Rosensweig. President Yahoo President Sue Deckerhas also emerged as one of the contender for the post.

Shares of Yahoo rose 4.42% in extended trading on Monday. In regular trade, it closed at $10.63, down 19 cents or 1.76%. Shares of Yahoo are down over 60% from 52 week high of $30.25.

Disclosure: Author does not own any of the stocks discussed here.