Battletoads :)

IF they did, it'd definitely be more awkward than DC vs MK; it'd be a complete abomination.

Conker
Banjo

They could get EA characters probably as well.

Ok, well ill list some possible characters, i think microsoft could make a good smash clone if done right.

Master chief
Arbiter
Guilty spark
Fable hero
Theresa (fable)
Marcus fenix
Dom santiago
Locust queen
Commander shephard
Various pinata animals
Grabbed by the ghoulies kids
Alan wake
Conker
Joanna dark
Banjo
Various killer instict characters
Blinx
Darth malak
Darth revan
Kameo
Crackdown agent
Sunset overdrive guy
Various characters from jade empire
Stubbs the zombie
Claptrap
Dragonborn
Chell
Kaim
Blue dragon kid
Logain (da origins)
Ezio (ac)
Batman
Raiden (metal gear)

Thats a start, I could think of more but Im getting tired so im going to bed

Yeah, I could see it working since MS nowadays probaly have more famous characters under their umbrella than Sony. The characters I would imagine:

Master Chief
Cortana
Marcus Phoenix
Cole Train
Conker
Banjo
Kazooie
The characters from Killer Instinct
Alan Wake
The marble from marble madness :)
Joanna Dark
John from Sunset Overdrive

Yeah, the list can prbably be twice or Three times as long, but those were just from the top of my head.

It would be a disaster for sure.
I just hope Sony never does that.
Oh... wait.

I would much rather prefer a mashup between Nintendo and MS characters though. Imagine Samus Aran vs. Master Chief or Link v. Marcus Phoenix. that would be so epic!

Conker VS Master Chief....... That would be so awesome.....

master chief
marcus feniux
a fable avatar
a pinata
the entire cast of killer instinct

No one.