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Microsoft Bid Adds to Yahoo!'s Heaping Plate

SAN FRANCISCO -- Yahoo! (YHOO - Get Report) already had its hands full when Microsoft (YHOO - Get Report) moved in for the kill.

The Internet company is in an even more precarious position now as it tries to hang on to its remaining talent and push the company forward.

Microsoft's $44.6 billion proposal to acquire Yahoo! came shortly after Yahoo! Chief Executive Jerry Yang announced he would slash 1,000 jobs amid a dismal outlook for 2008.

"To the extent that there's additional uncertainty with regard to the company's future, it will only create more challenges," says Cantor Fitzgerald analyst Derek Brown, whose firm makes a market in both Yahoo! and its rival Google (GOOG - Get Report).

Yahoo!'s shares have so far benefited from Microsoft's proposal. The stock has jumped as much as 53% since last Friday, when Microsoft publicly revealed its desire to merge the two companies, despite having been privately rebuffed by Yahoo! since 2006. Meanwhile, Microsoft's shares have dipped 7%.

Nonetheless, Yahoo!'s 14,000 employees, who might have been hoping for some much-needed direction, may not be getting it anytime soon. It could take months at best for the company to emerge with some sort of a resolution, and maybe even longer if the deal reaches the hands of the Federal Trade Commission or the U.S. Justice Department for review.

Such lengthy delays could put any one of Yahoo!'s current initiatives in limbo. Darren Chervitz, director of research at the Jacob Internet Fund, which has a position in Yahoo!, notes in particular the company's recent acquisition of Zimbra, which provides open source, next-generation email.

"If you're a Zimbra employee, you might be itching to jump," Chervitz says. "Anything that's new will be more vulnerable."

Yahoo! declined to comment beyond its original statement from Friday in which it said its board of directors will carefully and promptly evaluate Microsoft's proposal. John Robb, a spokesman for Zimbra, said the company's team "remains focused on our customers and delivering new production innovation."

He further noted that Zimbra has moved ahead with the 5.0 version of its product, released on Tuesday, as well as its latest version of Zimbra Desktop.

Even Yang has realized the need for him to keep up his troops' spirits. In a memo to his employees, written in informal lowercase letters, he acknowledged the disruption caused by the Microsoft proposal but urged everyone to stay on track.

"We can't let any of the noise we're hearing around this situation distract us from our core mission," he wrote. "It's critical that we continue to focus on running the business, executing our strategy and delivering value to all of our users, advertisers and publishers."

Easier said than done. Even if Microsoft never swooped in, Yahoo! would have had a difficult time retaining employees already pessimistic about the company's future.

"In the time that Yang's been CEO, we have not been particularly impressed with the plan he's laid out so far or the efforts that have seemed apparent to the Street," Brown says.

For all those who wondered whether they should rough it out with Yahoo! even before Microsoft's proposal, they may have a harder time convincing themselves to stay now, Chervitz says.

"These are in-demand computer engineers and marketing people in still pretty strong markets," Chervitz says.

For Microsoft, that could mean losing some of the very people it hopes to bring on board if the merger goes through. And for Google, whose search engine already has a sizable lead over Microsoft and Yahoo! combined, that could mean widening the gap as Yahoo! tries to sort out its future.

Still, Chervitz says Google's market is shrinking, so any increase in market share may end up being negligible. And given the current state of the economy, Yahoo!'s employees might not be so eager to put themselves back on the job market.

He imagines that turnover at the company may pick up 1% or 2% tops.

"I have a tough time believing it'll be a huge brain drain," Chervitz says. "But even a small level is not great."

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