EVEN AS GOOGLE

Microsoft's

Yahoo

"Google has to put up a stink just because that's their role in this situation," says Roger Kay, president of Endpoint Technologies Associates, a market intelligence firm. "But if I were in the boardroom at Google I would say something like, 'Let's act really upset about this deal but then let it slip through our fingers and have it go through.'"

Kay points out that the average for large integrations is two years, and this one is more complicated than most. Yahoo is based in Silicon Valley; Microsoft (already hardly beloved by the Yahoos) sits up in Redmond, Wash. The cultures are different. The engineering and marketing teams need to be sorted and assimilated. Yahoo operates on a lot of open source software. Microsoft, of course, runs on Windows. Just making the back ends of the two operations work together will be a tough technical challenge in and of itself.

"This is going to take project management on a scale that the Microsoft guys have never done before, and that is a formidable obstacle," Kay says. "And even if they're successful it's going to take a lot of energy and they will be somewhat distracted. That could give Google an opening."

Citigroup analyst Mark Mahaney pointed to that Friday after the proposed merger was announced. "This deal would be a material negative for Google if it were to change user behavior, which would then lead to a shift in ad spending," the analyst wrote. "But we don't think a Microsoft/Yahoo! combination would change user behavior at all. And we could see a scenario by which Google would actually gain more market share due to industry uncertainty over the integration of the deal."

Then there's the unknown of when this shotgun marriage will be consummated. Canaccord Adams analyst Peter Misek wrote Monday that if the deal gets done, competitive gains vs. Google aren't likely to start to emerge until 2009 at the earliest. Throw in the probability of antitrust reviews here and in Europe, and a closing could be pushed out even further. Bank of America Securities downgraded Yahoo to Neutral (Hold, essentially) from Buy Tuesday, saying that "the acquisition could face significant regulatory hurdles in the U.S. and particularly in the E.U., which could delay the acquisition from closing for quite some time."

Microsoft's big problem is that it needs to convert its piles of cash into capital for sustainable businesses that are going to make huge bucks a decade from now. But it's hard to see how throwing billions of dollars at Yahoo serves that end. Microsoft is a sprawling company with five businesses, and all of them are subservient to the company's lifeblood: Windows and Office. The online division isn't just an also-ran to Google and Yahoo; it's the only part of the company that loses money.

Meanwhile, Yahoo's been flailing about for years, losing share to Google and missing out on Web 2.0 innovations like social networking. True, it's the world's biggest destination on the Internet, but still...it's a portal. How 1990s. How quaint. No company is better than Microsoft at spinning a strategic vision, even if the quality of its software and hardware products too often falls short of its rhetoric. But to hear Chief Executive Steve Ballmer extol the opportunities and virtues of the deal, it's clear he's been drinking his own Kool-Aid.

"Everybody is praising this deal as a great idea and I'm thinking what are they talking about?" says Dave Stepherson, senior portfolio manager at Hardesty Capital Management, an investment manager and advisor, which holds a stake in Microsoft. "This isn't a lay-up. This is farther out than a three-point shot. This is a deal where I think one plus one will, at best, equal one."

The irony of the bear hug is that it comes at a time when things were finally starting to look up for Microsoft shareholders. The company has posted two blowout quarters in a row, thanks largely to Windows Vista and Office 2007, and the cycle driving that growth shouldn't abate anytime soon. The Xbox 360 division finally posted an operating profit. And the long-moribund shares have started to move for the first time in years. Now the specter of MicroHoo will likely weigh on the stock for the foreseeable future.

"We had four years of relative underperformance with [Microsoft] stock," Stepherson says. "It's like we've had this very long trek in the desert and the oasis is right in front of us. We're finally drinking water. And then Microsoft does this. Poof. Gone. Our thinking now is if this deal goes through, we're probably going to wind up selling our Microsoft stock. It just doesn't make a lot of sense to us."