Yahoo has been declining for a while now and there had been some talk of a merger (not necessarily with MS but with somebody) helping them out and putting them on top again. Microsoft's own news site is costing them a lot of money because so few people visit it compared to Yahoo, CNN, etc. So they figured if they offered a lucrative buyout it would be beneficial to both companies. Yahoo wanted more money, MS didn't want to pay it. Now, with all of the other mergers in th works, we face the prospect of something much larger. Imagine a Yahoo, AOL, M$ merger that was backed by Google. No one is buying out Google but I think Yahoo wanted to work with them on some new ideas since they're no longer rivals, really. They've both diverged their paths from being mainly search engines so long ago that they're not butting heads like they used to.
As ****** as AOL is, lots of people still use them, be it for ancient dial-up or for a super-expensive front end for their broadband connection. They're marketing was so good in the 1990s that they have a customer base that could never even conceive of leaving them. When I worked retail I talked to hundreds of people, showing them how much cheaper and faster signing up for Cable or DSL would be, but they wouldn't hear it. Many even outright refused to believe me that you could even get on the internet with anybody other than AOL. To them, AOL=Internet and they'll never change. So having a base like that brings in a lot of guaranteed traffic and customers that will never go away. Integrating that with Yahoo would definitely be a big boost since they could set up Yahoo.com as the default news source for these users and they'd never go anywhere else.
