Yahoo have blogged an initial response to Microsoft's advance. In summary; "We're thinking about it".
Yahoo!’s Board is going to evaluate all aspects of this proposal carefully and promptly in the context of the company's strategic plans and alternatives. So it wouldn't be appropriate to speculate about the potential benefits or challenges of a deal. But the review process that's underway won't have any impact on our efforts to deliver value to all of our users, advertisers, publishers and partners – as well as new and exciting opportunities to our employees.
The FAQ is fairly weak and has only four points. It's hard for Yahoo to come out with a strong reply this early. Although it's tempting to be scornful of the short reply, I do appreciate the need for candidness.