To: Jerry Yang
From: Jack Flack
Subject: After Microsoft Walks

Congratulations. You're about to "win."

Some people speculate that Microsoft's threat to pull its bid is simply a negotiator's bluff. More likely, it's actually trying to pre-establish the logic for their retreat, hoping the coverage will cast them as shrewd, not weak.

When they do pull back, the Yahoo story will shift dramatically. Thus far, most of the coverage assumed that Yahoo is a business that cannot regain its past glory, and that your company has no future on its own. While many predicted a pyrrhic victory for Microsoft, suddenly you're going to be the one who stands to lose by winning.

Much of the scrutiny will focus on you personally, given that many people suspect that your emotional resistance, not cold valuation analytics, drove you to reject the deal. To avoid going down in history as the peculiar, stubborn founder who preferred to manage his once-great company into the ground instead of selling it to the Evil Empire, you must act boldly against four pieces of advice.

1. Play the "Choice" card

Minutes after Microsoft announces the withdrawal of its offer, issue your own statement declaring the retreat a victory for freedom of choice and independent thinking. Proudly explain that the tech industry is becoming a duopoly of Google and Microsoft, and that Yahoo is one of the few competitors large enough to provide a genuine alternative.

Your lawyers were right to make you quite sensitive to the need to minimize your exposure to shareholder lawsuits by staking your rejection of the bid to a valuation argument. But now, you must make additional arguments that appeal to the interests of all your other constituencies.

Repeatedly explain to your employees that they not only have the opportunity to save Yahoo, but also the chance to prevent the industry itself from falling into a Dark Age of Dominance.

Within the tech world, harp on the importance of not selling out, ensuring the small players understand that the only way to keep a couple of 800-pound gorillas honest is to make sure there are also a few healthy 400-pound gorillas still hanging around the jungle.

Most important, consistently remind advertisers that they need you to succeed so that they can have legitimate alternatives on-line. They already worry about how much power Google has, and so it shouldn't be a tough sell.

2. Get ready for the heat—and a return visit

Ballmer has emotions of his own, and you should anticipate Microsoft will immediately seek to damage your business as much as possible. Assume it's already moving to block the expansion of the outsourcing arrangement you're testing with Google.

Google will keep telling you it wants to make that deal happen. But don't be surprised when things suddenly start moving a lot more slowly, as your new "friends" in Mountain View begin demonstrating a heightened sensitivity to their own antitrust vulnerabilities.

The moderates hope your stock price drops only to $20 when Microsoft walks. Even if they're right, tepid earnings over the next few quarters will drag your stock into the mid-teens. When that happens, Microsoft will come right back after you.

Assume that this has become completely personal with them, and that they will not even bother to ring the doorbell this time. Instead, they'll go straight to a hostile offer that carries a premium of 20 percent or less.

That's why you must…

3. Deliver

You laid out a bullish plan to justify holding out, and now you've got to make much of it happen very quickly to maintain credibility. Most important, you need to quickly demonstrate that your "must buy" concept can actually work, and so you should not wait until the third quarter to launch your new AMP! program. Without that kind of urgency, you'll never get the revenue growth required to fulfill your promise of restoring cash operating margins to 42 percent.

All of that will be essential to buying time. But it will not sustain you for the longer haul, and you'll need to think "transformational." I know you want to stay involved, and so selling out-right is not an option. Thus, there's only one sensible deal of substance out there for you.

4. Absorb AOL

Try to do the same deal that was on the table last month, and use the transaction to build additional structural impediments to another Microsoft bid. As you negotiate, don't get too precious about the numbers, as Ballmer will be sitting outside Jeff Bewkes' office, holding on his knees a much bigger briefcase than yours.

Insist the name of the new company will be "Yahoo Online." Not only will that allow you to euthanize that annoying exclamation point at the end of your name, but it will also make you hero to many by finally killing the name "AOL."

Take a role like "executive chairman," and limit your engagement to high-level strategy and special projects. Make Randy Falco the C.E.O., sending a clear signal that the business will be run with a clinical view of the future, not a moistened eye on the past.

And oh, speaking of Ballmer, if you wake with him doing that monkey dance on your lawn tomorrow morning, then that probably means that I'm wrong about them retreating. If so, that's going to require an entirely different Rescue Memo.

Good luck.

JF/lpp