[Update: Would Microsoft try a hostile takeover if Yahoo! rejects the offer? That would be very interesting and a can of worms I am not sure Microsoft wants to open]

Yahoo! has not accepted this deal yet.

In the back of my mind, I knew this would happen. In fact, after Yahoo! reported earnings earlier this week, and the stock plummeted, I thought to myself “I bet Microsoft buys Yahoo! now”. I didn’t buy Yahoo! stock. Oh well, woulda, coulda, shoulda, I guess.

Anyway, I am still chewing on this deal. Is it good for Microsoft? Is it good for Yahoo! Is it going to be a disaster a la Time Warner-AOL?

The big and obvious question is how Microsoft plans to integrate Yahoo! into its Windows Live offerings. That is a huge undertaking in my mind, and not a 100% slam dunk by any means. For example, what becomes of Yahoo! Mail — does it get integrated into Windows Live Hotmail? Does Microsoft integrate Yahoo!’s search algorithm into its Windows Live Search?

And, not to mention the culture clash of the two companies. Yahoo! is already laying off 1000 people. Can Microsoft absorb the other Yahoo! employs, or will a mass layoff come?

And then comes the other side of the equation. How does this affect Google? Of course, this deal is a direct aim at Google. Google’s stock is starting down after it reported “not great” (according to analysts) earnings last night. That doesn’t really matter with respect to this deal, I don’t think. It is a long term question — will Google’s dominance be affected by this deal in a negative fashion? This deal would make Microsoft the clear #2 in the search/advertising space, but could it make Microsoft #1?

Very interesting start to the morning, for sure.