Microsoft has openly declared that its bid to acquire Yahoo aims at improving their position in advertisement and fight the dominant position of Google. Do not expect Google to remain quiet.
What are Google options to defend from Microsoft, apart from sending missives? Counter bidding for Yahoo, is not an option as it would not be approved by authorities. Getting a deal to post Google ads on Yahoo search, would give Yahoo some air to look for alternatives to Microsoft bid, but still Google would be helping a direct competitor, not to be underestimated.
So in the event the acquisition succeeds, what should Google do?
I would recommend: Hit them where it hurts
Microsoft gets a big chunk of their revenue, and more importantly of the profits, from Windows and Office software licenses. These profits are to finance the online services of a merged Yahoo-Microsoft Live.
What can Google do about that? Goobuntu. The same way Google is bringing Linux to mobile devices with Android, Google is the only company that could make Linux conquer the desktop and hurt Windows and Office.
People love Google, and many people hate Microsoft. Hit them now. Millions of users would thank you, Google.
Note: Meantime, the bid already had its effects and Yahoo is stopping its online music service.