A successful deal would make the combined entity much more formidable in the online advertising market, which is estimated to grow from $40 billion in 2007 to nearly $80 billion by 2010.
Besides the internet search market, Google currently also enjoys a significant share in higher-revenue advertisement market worldwide, including India.
"The Indian online advertising market is still in a very nascent phase and there is room for every player," said the US-listed Indian internet firm Sify's chief communication officer David Appaswammy.
Sify has an alliance with Google for its search service 'Khoj' and the deal would not impact it, he added.
Google dominates the internet search market with an estimated 85 per cent share, while the rest is shared between Yahoo!, Rediff and other players.
From a worldwide market point of view, a final deal would give Microsoft a good play in the online market, said rediff.com's vice-president (Marketing) Manish Agarwal.
"They can become a serious player online, have a good share... A lot of synergies would come from the product point of view, from consumers' behaviour, and from innovation," he said, adding that it would make Microsoft number two player in the online space.
Asked about the probable job cuts post-merger, Agarwal said there could be some issues on that front in the US, but there should not be much from an India perspective.
Pankaj Jain, chief operating officer of webdunia.com, a domestic multi-lingual portal with nine-language search engine said, "Microsoft is known for market leadership based on innovative products and aggressive marketing. (But) in the search space, it is well known, that Microsoft has not been able to establish a competitive edge. Their own properties are not doing too well."
"Microsoft has no choice but to acquire technology in the search space, by bidding for Yahoo!. The synergies between Microsoft and Yahoo! can offer a challenge to the might of Google provided it can achieve integration of technologies. That will be a bigger challenge for the merged entity," Jain added.
"The joint entity, if and when happens, will need dramatic technology breakthroughs to achieve this," he said.
According to analysts at technology research firm Forrester, the area where Yahoo! and Microsoft need to catch up on is emerging areas such as social computing.
Despite Microsoft's acquisitions such as Flickr and del.Icio.Us by Yahoo and efforts such as Windows Live and Live Spaces, both players are woefully lacking in this area, Forrester's Charlene Li said.
"A combined MSFT/Yahoo/Facebook deal at some point in the future could be the media company of the future," Li said.
The combined Microsoft/Yahoo! should happily take second place to Google in the search business, and focus all of its energy on trouncing them in the brand advertising (with an emphasis on display ads and online video) space, Forrester's Shar Van Boskirk said.
On the Microsoft bid to acquire Yahoo, research firm Gartner said although the synergies between the two companies are certainly great, the merger would also raise the question of how effectively they would continue their operations.