From what I've heard about how Yahoo and Microsoft work internally, I'd say the corporate culture is probably radically different between the two. If there's too much of a culture clash, a lot of Yahoo employees could end up quitting after the merger.

Institutional Shareholder Services points out that there's a lot of overlap among owners of Microsoft and owners of Yahoo, and that may cause them to push Yahoo towards a sale on terms that maximize the value to them based on holdings in both companies, even if it doesn't maximize the value for Yahoo alone. (John Nash, are you out there?)
http://blogs.barrons.com/techtraderdaily/2008/02/15/report-yahoo-mi...

Never mind.

As with anything else, the company is only worth what they can sell it for. Any other valuation is meaningless. Microsoft would be smart not to bid against itself. If management thinks it is worth so much more, then they should buy it themselves by way of, for instance, a leveraged buyout.