With a merger shelved, many on Wall Street were left wondering Monday how Yahoo! will justify to shareholders walking away from Microsoft and the subsequent plunge of its stock price.

Investors said they are perplexed as to how Yahoo could justify a $37 a share offering price, especially given the company’s performance during the past year.

“Yahoo’s Jerry Yang is either going to be the ‘Chief Executive of 2008’ or be fired,” said Colin Gillis, an analyst with Canaccord Adams. Gillis downgraded the stock to a “sell” on Monday.

Over the weekend, Microsoft (MSFT) walked away from its bid to purchase Yahoo for about $32 a share after the two companies could not agree on a price. Microsoft was willing to offer $33 a share, while Yahoo apparently wanted $37 a share.

“We really were expecting some middle ground between these two companies,” Gillis said.

Microsoft’s move was a surprise to many on Wall Street. Earlier last week, Microsoft Chief Executive Steve Ballmer said the company might pursue a hostile takeover.

Investors placed most of blame on the collapse on Yahoo! (YHOO). Yahoo executives were too stubborn on the price, they said, calling the $37-a-share offer an arbitrary figure. Yahoo!’s stock was $19.18 a share before Microsoft announced its bid in late January.

“It seemed that Yahoo created that $37 just to keep Microsoft away,” said Darren Chervitz, co-portfolio manager of the Jacob Internet Fund and an owner of Yahoo! shares. “I find it quite fascinating that a company who doesn’t comment publicly on the price of its stock suddenly has an idea of what the company is worth.”

Yahoo’s Yang could also face intense pressure from shareholders. A CEO’s primary responsibility is to the company’s board of directors, and ultimately its shareholders.

Chervitz said he believes that pro-merger shareholders could push forward a slate of directors at Yahoo’s annual shareholder meeting this summer in a move designed to force Yang out.

“I am very disappointed with Yang’s performance,” he said. “I don’t think he wanted to sell to Microsoft for personal reasons, not because it wasn’t the best deal that Yahoo could get.”

Both the Wall Street Journal and The New York Times reported that shareholder lawsuits were filed against Yahoo over the weekend.

The original purpose of the deal, according to Microsoft, was to directly compete with Google (GOOG) in the Internet search and advertising market. Google has dominated both businesses for several years now, which has left Yahoo and Microsoft as distant two and three respectively in the field.

Analysts aren’t worried about Microsoft. The company sits on a massive pile of cash and could use the money to purchase other Internet properties or potentially expand its Internet presence substantially. 

There is also the possibility that Microsoft could return to the table with Yahoo!, but the amount that Microsoft will offer for Yahoo! will decrease.

Chervitz and Gillis said Yahoo can potentially turn the company around in the short run. Yahoo! is in talks with Google about combining the two companies’ advertising businesses. But, investors say Yahoo! is sacrificing itself in order to make some short term gains in revenue.

“Yahoo is feeding its competitor, a much bigger and much more efficient competitor,” Gillis said. “Also, it’s easy to forget that while this Microsoft/Yahoo saga was going on, Google closed the deal with DoubleClick,” Gillis said. “Google is just cranking along – and Yahoo and Microsoft are stuck back where they started in January.”