There has been endless amounts of ink shed on this already. That said, I'll offer a few words from the perspective of someone who was on the frontlines of this battle for a long time (I was with Yahoo! for 5 years, and handled business development for the search team when things were booming).
Search is the new Great Game, as Chris Sherman termed it a few years ago. The term was originally coined by Rudyard Kipling and refers to the struggle for empire in Central Asia between Great Britain and Russia, with a host of proxy states and battles in between. If you want a riveting account of how the Great Game played out, and how it's impact is still being felt in the global economy and security situation, read Peter Hopkirk's book (link at left), which is even better than a work of fiction.
So why will Microsoft + Yahoo work? First, to paraphrase James Carville: it's the economics, stupid. As BusinessWeek aptly puts it, "More than $400 billion in global advertising is looking to make sense of online media, and no garage-based startup, no matter how visionary, can meet such high-volume needs. For the foreseeable future, it will be the reigning behemoth of the PC operating system vs. the emergent giant of the online world, competing for online consumers with resources of gargantuan proportions." A combined Microsoft-Yahoo will still be #2 in this market, but even #2 can make a lot of money in the near term.
Second, there's been a lot of talk about the culture clash involved in putting together a Redmond software company and a Silicon Valley Internet outfit, see, e.g., Fake Steve Jobs' take on it. This issue is way overblown. People forget that when Yahoo! bought Overture in 2003, who were Overture's two largest distribution partners? Yahoo! and Microsoft. And guess what? Microsoft was happy enough with the relationship to re-up for another two years, so (at least on the search side) the two corporate cultures have worked quite well together in the recent past and forged a bond over their shared dislike/fear/concern about Google. Sure, there may be some culture clash in other business units but ultimately this deal comes down to search and advertising, so those are the two groups that matter most.
Finally, while some talent will undoubtedly bail out, I've spoken to enough talented engineers on the Yahoo! Search team who have spent the last 5-7 years trying to out-Google Google (some as far back as Inktomi and AltaVista), and they don't want it all to have been in vain, e.g., throw in the towel and simply outsource search to Google. Their view is, if Microsoft really wants to win in search and has the deep pockets and corporate commitment to do so, they are willing to redouble their efforts to try and beat the Mountain View boys.
Enjoy the Great Game in the meantime!
