The way you play both games is way too different, everything is basically the opposite in the other. Thats something you cant balance
You know, I am not a veteran in game development (been doing it only for 5 years), but I had enough moments of laughing my ass off, when someone says "You can't do this! It's impossible!" without even trying, while someone just goes and does it. So until proven physically. I am pretty positive it can be done. It is just a massive hard work.
Just because two things are opposite, doesn't mean you cannot merge them and create a new middle ground. And that is a must for something like this, because if you merge two games (doesn't matter opposite or not) you will always have to create a new system, which is exclusive to that combination.
So at least after small brain storming, the only way I see this game happening is, if only main elements were to be taken from both games and then incorporated into a new exclusive fighting system which would be made only for MKvSF. For example if we were to take main moves from both fighters. Like Cammy's and Sonya's and then integrated them into that new fighting system. They would use their iconic moves, but in unique new fashion.
As for SF being "family friendly" and MK being "family nightmare", you would just need to simply even out the violence. Cause one of the main reasons, why MKvsDC failed so hard, was because they went too much DC way. Ok I get it DC didn't want to see Superman beheaded. But making fighters feel like stuffed dolls was also stupid.
You can't have fatalities, as that would be too much MK, but you can't have those family friendly finishers as well. So what does one do? Simple (in theory). Make fighter bodies durable to damage (avoid making them look like flesh of bags which you can cut like tofu), but add some sort of bone breaking, impalement. Add xray effects. Don't add guts, or musles, but basically make it into xray blue flash (not cartoonish and not a cutscene), for when you hit with strong attack or combo, so a person would feel the satisfaction of destroying the opponent, but at the same time you wouldn't get that fragile body feeling like you do in MK.
Then create a finisher which incorporates both elements from MK and SF. Take out the "after match fatality" and make it so that you could only do a finisher during the fight. If you were to do a finisher mid fight, you just do a huge amount of damage, but if you do it, then opponent has low enough health to be finished by it, you would get a brutal finisher where, character would either break opponent's body, snap his neck, impale him, burn him etc.
Also there should be some blood. Not MK stupid amount, but enough to show that both get injured. Hell some NORMAL battle damage could do as well.
Just some quick ideas. I mean if both devs teams saw the possibility of that happening, then there is no reason to think it is impossible. Just very hard to accomplish and very risky too, because we have a lot of die hard fans on both sides, who tend to whine and cry about any small gameplay changes. Basically anything new is a taboo for them. According to them it must be either MK system or SF system. But don't you f%^king dare to make something new which unites both of them into one.
Fortunately there are also people who like to try new things, make new progress. The only problem is that a lot of them (like me) are skeptical about it happening due small demand and the difficulty of the task. Not to mention it would have to be two companies working on it. So it would be massive project. It wouldn't be like MKvsDC where Netherrrealm (well Midway back then) had the license and just did everything themselves.
Basically the only reason why I would want to see MKvsSF happening, would be because both of the games would have to move from their native platforms and reinvent their core mechanics, so they could match. Would be also a refreshing change for SF gameplay too.
Also now that I think. SF isn't really that much of family friendly. If you try to piece lore together, you could see that it is pretty dark too. Especially when it comes to Shadaloo. So making it darker wouldn't be so hard. Cammy's backstory is pretty gruesome (when she was Killer Bee), or hell Dolls themselves. They backstory is nothing, but disturbing. Killing their own parents, and then even after being rescued one of the dolls was left in vegetable state due massive psychological trauma. Take away pretty lights (censor), and you see a pretty messed up world.
In the end.. it is all just a theory. Unless someone makes (at least) a playable demo, we can speculate all we want. Maybe it could work, maybe it couldn't. Without any concrete physical example, we can't tell.