Ah, the morning after.

Microsoft and Yahoo have finally come to an understanding, putting to rest what seemed like an endless back-and-forth (As Barry Diller said yesterday,  “We’re not going to have to talk about whether or not it’s going to happen anymore).

In case you were at the beach, on the golf course, riding your bike, or hiding out in a cave yesterday, here are the very basics: It’s a 10-year Web search deal; doesn’t include display; Microsoft will the guarantee revenue per search for the first 18 months; Yahoo expects deal to boost income by $500 million and save about $200 million in capex; Microsoft will pay traffic acquisition at an initial rate of 88 percent; Yahoo will act as the global sales force for both companies’ premium search advertisers; etc. etc.

Just about everyone has weighed in on the deal, and more analysis is certain to come in the days ahead. In the meantime, here’s what we see as a few key questions about the deal.

Will it get regulatory approval? Tough call. It certainly will get a close look, given the high-profile names of the companies involved. And, remember, it leaves really only two major search engines rather than three. On the other hand, is the market really competitive at the moment? And won’t Google just keep extending its lead — and hurting competition — if Yahoo and Microsoft don’t get together? “Without this deal, I think it would be really unlikely that you’d have a market with three robust search providers in 10 years,” said Beau Buffier, an attorney with Shearman & Sterling LLP. (More here from Reuters)

What do advertisers and media buyers think? Most appear, at first blush, to be happy with the deal. Having one dominant search player — Google — makes it tough for the advertising community. So they seem to welcome the idea of some competition. Plus, it simplifies life for media agencies. “”This is extremely encouraging and introduces more balance into the search and display markets,” said Sir Martin Sorrell, chief executive of British advertising group WPP. “It is good for our clients and our agencies and for regulators.” (More here from Reuters)

Can Yahoo and Microsoft put their differences aside? This is always a major hurdle in joint-ventures, partnerships and mergers. It could be especially difficult in this case, given the fiercely competitive nature of both companies. What’s more, in the case nobody is fully in control, unlike a takeover, where, it may be ugly, but one company can impose its will on another. “It ties them together but in a complicated way with no long-term certainty and limited control,” said Ryan Jacob, chief investment officer of Jacob Asset Management, which owns Yahoo shares. (More here from Reuters)

Who came out on top? This will be the big one — at least in dinner party circles.  The early opinion seems to be Mcrosoft (particularly if you want to use stock market performance as a gauge). True, Yahoo is getting a big 88 percent of revenues from sending queries to Microsoft, it will cut spending, and increase operating income. But what about the company itself? Is banking on display advertising really a smart move? Are they locked into a strategic no-man’s land for the next 10 years? As BreakingViews put it, “This turns Yahoo into a company oddly reminiscent of the Internet also-ran AOL.” Reuters columnist Eric Auchard offered a similar comparison, writing “For Yahoo shareholders, it’s value destruction not seen since the misguided merger of America Online and Time Warner at the peak of the dot-com era.” (More here from Reuters)

Keep an eye on:

• Believe it or not, there is other news in the media world. For instance, Cablevision has approved the spinoff of its Madison Squarter Garden unit (Reuters).

• Sony had a tough quarter, reporting a big loss. Again. But the company says better times may be in sight.  (Reuters)

The world’s largest software firm is cutting 5,000 jobs as it faces the worst economic crisis in its 34-year history. 

No further cuts are planned, but with no end to the recession in sight, how long can it be before Chief Executive Steve Ballmer has to chop more of Microsoft’s remaining 93,000 or so workers? 

Here are some of Ballmer’s comments from a conference call with analysts:

• “We think we have taken the right degree of action in terms of reducing the cost base.”
• “We are taking out somewhere between 5 percent and 15 percent of the cost line… which we think, in this environment relative to the reset in the economy, is probably the right level.”
• “Our model is not for a quick rebound (in PC sales).”
• “If the economy stays down and then builds slowly, we are probably at about the expense base… You can’t tell. The economy could also get a whole lot worse.”

(Photo: Reuters)

So often with these things, there’s a lot of PR-speak and dancing around. But let’s give Microsoft’s top brass some credit –  they pretty much addressed the whole Yahoo thing head on during the annual meeting with Wall Street analysts up in Washington state.

Finance chief Chris Liddel was particularly clear on the subject. Take it from his boss, Steve Ballmer.

“I think Chris was just about as black and white on that topic as we’ve ever been,” Ballmer said shortly after Liddell finished speaking.

So what did the CFO say? Have a read. Oh, and we bolded a couple of key points if you don’t want to read the whole thing.

“A few comments on Yahoo. Why Yahoo and what view changed going forward? Clearly, as Steve said, this was a tactical way of driving progress in the key areas that we see. We went into the acquisition totally genuine. We thought it was best for us to combine as companies and we believed we offered incredibly good value of the shareholders of Yahoo. What changed? We took the view — and we still take the view — that Yahoo is essentially a declining asset. We made an incredibly generous bid with a very high premium because we were looking for speed. Speed was, as I’m sure you all will agree, the last thing that we’ve actually managed to achieve with the acquisition… 

Time passed and value eroded. And we don’t have a situation now where the initial offer that we made makes any sense from economics. I get the question – I got it recently as lunch — ‘You guys need this for online strategy there’s no sort of boost you can get from Yahoo! by doing things organically?’ Yes.  Does that mean we should pay anything for it? Does that mean we should pay $31, $33, $40 whatever number you like? There has to be some economic justification for acceleration at the end of the day. If time passes and the value of what we are buying erodes for one reason or another, it stops making sense for us to do it.

In terms of going forward, I think the chances of us buying Yahoo on a full acquisition basis are so small that they are essentially negligible. I never say never. Who knows in years to come? But a full acquisition just certainly in the time frame and (with the) sort of economics that we’ve previously thought…  essentially makes no sense. We still have the possibility of doing a search transaction that we think makes economic sense.  If I had a worry (it’s that) the parallel paths continue. About the time that Yahoo decides that search deal makes sense for them, it’s about the time we’ve worked on our plan so much that it no longer makes sense for us. But we shall see.  

 As Ballmer said, that’s pretty black-and-white. 

And it was thus decreed that the messengers of Steve Ballmer were sent far across the land to say No to an alliance with the kingdom of Yahoo:
    
“Yahoo could always come back again and say please buy us for $33 (a share) and I’m sure we might reconsider it, but we’re not assuming that’s going to happen,” Microsoft Chief Research and Strategy Office Craig Mundie to Reuters in Jakarta, May 8. 

“The conclusion was reached that we should pursue our independent path,” Microsoft Chairman Bill Gates in Tokyo, May 7.    
    
“The key decisions on that will be made by Microsoft CEO Steve Ballmer, who took a look at Yahoo and decided that, on our own, he likes the stuff that we’re doing,” Gates in Seoul, May 6.

“We decided to move on and basically withdraw our offer …. Absolutely, that’s the end of the story. We are moving on because our strategy is very clear,” Microsoft International President Jean-Philippe Courtois to Reuters in London, May 6.

The globe-trotting Microsoft messengers have yet to fully convince Yahoo shareholders of their sincerity, since investors have propped the stock up to nearly $26 despite the break-up of talks over the weekend. That’s well below Microsoft’s last offer for $33 per share, but still perched higher than the $19-level, where Yahoo traded before the takeover offer was made public on Feb. 1.

Maybe shareholders are mindful of Microsoft’s last world tour in April, when Ballmer hopscotched through Morocco, Italy and Belgium saying there was no way he would raise his initial offer of $31 for Yahoo. Two weeks, and two dollars per share later, Yahoo is still waiting.

Keep an eye on:

* Rupert Murdoch says News Corp is feeling the squeeze on advertising budgets due to a weakened U.S. economy; the company’s division that includes MySpace will likely miss a $1 billion annual revenue goal by 10 percent. (Reuters)

* Warner Music Group’s quarterly loss comes in worse than expected and the company suspends its dividend to raise cash and cut debt. (Reuters)

* NBC Universal is starting a 24-hour local news network in New York, in what could be the first of several such channels around the country, to help weather a weak local TV advertising market. (WSJ)
 
Photo: Reuters