Silicon Valley’s eyes are all on the empty seat of CEO of Yahoo! Inc. After Jerry Yang stepped down following his failure to get the company out of the slums, everyone’s asking who his successor will be, and how well he’ll do.

Yang, who co-founded Yahoo!, announced that he would relinquish his role as chief executive as soon as a replacement is selected. Yang will go back to being Chief Yahoo the title held before his 18-month stint at the head of the company.

However analysts and internet watchers say that a question as important as whom the next CEO will be is that of Yahoo’s direction. Will the company remain independent, and continue to try and outfight Google by expanding its field, or should it sell some or all of its business to another major player, such as Microsoft or (merge with) AOL.

It looks like Yahoo’s shareholders are favoring a deal. Yahoo shares rose almost 9 percent (92 cents) on Tuesday to $11.55, which is indicative of hopefulness that the end of Yang’s ‘rule’ will help along a deal with a buyer.

Microsoft Chief executive Steve Ballmer has reiterated that he has no more interest in bidding for Yahoo, but is however looking to buy its search business. Observers and internet figures seem to agree that this may be the company’s best (only?) course of action.

“Yahoo is still in many ways the definitive brand of the consumer Internet, but I don’t think they can or should compete with Google any longer,” said Ross Levinsohn, Fox Interactive Media’s ex-president. “That game is over.”

The Yahoo board, provided it agrees, is going to want a chief executive with experience in deal-making, but who is also able to run the online media properties left to Yahoo after the sell-off.

Some potential candidates to take Yahoo in this direction are News Corporation president Peter Chernin; former AOL chief Executive Jonathan F. Miller; and John Chapple, former Nextel chief Executive. Chapple is on the Yahoo board since this summer, arriving with activist investor Carl C. Icahn.

Another path that Yahoo could take is to scrap the idea of an acquisition deal altogether and find a leader who would stabilize the company, unify its employees and capitalize Yahoo’s massive technological assets. Candidates befitting this role would have to have a technical background. Some that come to mind are Netscape co-founder Marc Andreessen, and former eBay executive Jeff Jordan who currently runs online reservations for startup real-time restaurant reservation company OpenTable.

Yahoo! President Susan L. Decker is also considered for the job, although analysts point out to the fact that as she is considered to be part of Yahoo’s problem in the first place, she along with anyone from the current Yahoo! leadership will be seen in a very skeptic light by investors.

Whatever the decision of the Yahoo board will be, the company still has a number of notable assets with which to work. The company still has 500 million users a month, is still the most used webmail service, and has profitable internet franchises in the domain of sport and video. Given their large and loyal audience, there is still hope for Yahoo; a bit more thought-out strategy is what’s required.