The Yahoo (YHOO) plot thickens, and it’s sending the technology-related stocks and exchange traded funds (ETFs) higher in midday trading.

For those playing along at home, Microsoft (MSFT) is threatening a hostile takeover bid. Yahoo doesn’t like the offers that have been made so far. And now, Yahoo is teaming up with Google (GOOG) in a two-week experiment to test how much more advertising Google can sell for its rival, reports Michael Liedtke for the Associated Press. If things go well, Yahoo will combine its online operations with Time Warner’s AOL, which would make a cash investment in exchange for a 20% stake. Google already handles AOL’s search advertising.

Yahoo would then use that cash to buy back stock and put money into shareholders’ pockets. If all this fancy footwork increases the pressure for Microsoft to make a higher bid, they may launch a counterattack with News Corp., part of Rupert Murdoch’s media empire.

A merger with Yahoo and Google, however, probably wouldn’t get antitrust clearance, because Google and Yahoo combined would control 80% of the U.S. search market.

The back-and-forth might be confusing, but one thing is clear: the technology funds are enjoying it.

  • Internet HOLDRs (HHH)
    • up 1.3% midday
    • down 4.9% year-to-date
    • Yahoo is 20.4%; Time Warner is 11.3%
  • iShares Dow Jones U.S. Technology (IYW)
    • up 1.8% midday
    • down 14.2% year-to-date
    • Microsoft is 12.4%; Google is 5.4%; Yahoo is 1.9%
  • Technology Select Sector SPDR (XLK)
    • up 1% midday
    • down 13.5% year-to-date
    • Microsoft is 10%; Google is 5%; Yahoo is 1.7%

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.