Yahoo strangely enough has a large following, that microsoft wanted to tap into, to give them more marketshare against google. They have since retracted their offer, and I think personally that it's because they decided that they are just going to try and make it with their revamped search portal live.com, and yahoo is just not worth it.
Also, Yahoo didn't really make such a bad move. In most scenarios where one company tries to take over another, usually the first offer is rejected in hopes that a second offer will be made that is better than the first. The company being taken over hopes that the first bid garners enough interest throughout the industry to boost their value. In this specific case, Yahoo didn't realize that microsoft would back down.