The Microsoft press release says it all. I think is is great news for Microsoft. Trying to takeover Yahoo! (especially in a hostile bid) would have been a huge distraction for Microsoft. It would have soaked up so much money and management attention that could be better focused on things like getting Windows 7 out the door, Silverlight, etc.
Even if Yahoo! had accepted a non-hostile offer, getting regulatory approval, (especially from the EU, which hates Microsoft) would have been a long, costly process. A hostile takeover would have been much worse.
I sort of thought that this would happen after I heard Steve Ballmer on stage at the MVP Summit a couple of weeks ago. Ballmer is a good showman and entertaining speaker. He was asking the 1800 MVP attendees what default search provider that they used (by a show of hands). He started with Windows Live Search, which got maybe 10-15% of the audience. Then he said Yahoo!, which garnered virtually no votes. He made a comment along the lines of "And we’re paying how much for them?". Finally, he said Google, which got 85-90% of the hands.
His reaction was classic. He said "Oh wow!", and crest-fallen, he covered his face and paced back and forth for a few seconds. Then he said "Let me make you a deal: we’re going to be making some major improvements to Live Search later his year. When that happens, we will send all of you an e-mail, and then I want you to try using Live Search for one week, and then tell me what you think".