Both Microsoft and Yahoo! had a long head start on Google. For awhile Yahoo was even "Powered by Google". Yahoo was part of the Internet Bubble with an over-inflated stock price that corrected itself in a hurry. The founders lost a paper fortune.

Along came Google, which essentially was the same thing, only much better. A few examples:

Yahoo and MSN Maps sucked.
Google Maps debuted and are innovative, fresh, and useful.
The pair struggled to keep up and *revamped* their Maps, essentially copying the new and improved features from Google.
Years later Google Maps is *still* better than Yahoo Maps and MSN maps with new features added all the time.

Yahoo Mail and Hotmail sucked.
GMail is introduced by invitation only and blows Hotmail, Yahoo Mail and basically every other free mailing system out of the water.
The two limp in and "revamp" their email, basically taking features and ideas (like increasing how much space you can have) from Google.
Years later Gmail is *still* leaps and bounds better than Yahoo Mail and Hotmail.

Nearly every feature (except Instant Messaging - Google Talk still needs a lot of work) from Google works better and is more useful than the same feature from Yahoo! and MSN:

News
Finance
Search
Calendar
Photos
Documents
Blogs
etc.

If you look at the Alexa rankings for Yahoo the graph slants downward sharply. The same rankings for Google show a rocky but steady climb. Same thing goes for the stock prices, within reason.

When third place buys second place it doesn't equal first place. Microsoft should spend $40B on making msn.com better, rather than buy a sinking company that hasn't shown a hint of innovation in the last 5 years.