Microsoft is understood to be in preliminary talks with Time Warner about buying AOL, the media group’s internet unit, The Times has learnt.

The software giant is understood to be keen to find alternative acquisitions to increase its internet presence after being forced to abandon plans to buy Yahoo! for $47.5 billion (£24.1 billion) at the weekend.

It is not known whether the talks between the two parties began because Microsoft was trying to stymie discussions between Time Warner and Yahoo!, its initial bid target. However, it is understood that talks between Microsoft and Time Warner are continuing, even after the collapse of the software group’s offer for Yahoo!.

Microsoft is interested in AOL’s similarity to Yahoo!. Time Warner’s internet unit has an estimated 85 million unique users a day on its website and plenty of advertising. The online advertising market, estimated at a yearly $40 billion, could double by 2010.

Although at the time of AOL’s ill-fated reverse takeover of Time Warner in 2000, in the dot-com boom, AOL was valued above $150 billion, it is thought that now the business would be less expensive than Yahoo!. In 2007 AOL had revenue of $5.2 billion.

It is also understood that Yahoo! is continuing “very real” talks with AOL about a possible tie-up. Jerry Yang, chief executive and co-founder of Yahoo!, is under pressure to prove that his rejection of Microsoft’s revised $33-a-share offer for the search engine at the weekend was sound. The raised bid valued Yahoo! at a 70 per cent above its value before Microsoft’s approach was made public.

Yesterday, Yahoo! shares plunged by as much as a fifth as New York opened for business. They ended the day off $4.30, or 15 per cent, at $24.37, well below the initial $31-a-share offer from Microsoft and the revised offer.

Some analysts expect Yahoo! shares to shed most of their 50 per cent gain since Microsoft’s initial offer on January 31. That would cut Yahoo!’s market value to about $30 billion.

Darren Chervitz, co-manager of the Jacob Internet Fund, a Yahoo! shareholder, said yesterday: “Clearly there’s frustration. I am not even sure if Yahoo! cares about its shareholders because they didn’t show much regard for shareholders’ best interests in this process.”

Eric Jackson, head of Ironfire Capital, a small hedge fund activist, said he was “mad” about Yahoo!’s rejection of Microsoft’s bid. He is urging shareholders to withhold their votes for the reelection of Yahoo!’s directors at its annual general meeting next month.

“Yahoo!’s rejection was not in the best interests of shareholders,” said Mr Jackson, who led a successful campaign to oust Terry Semel as Yahoo! chief executive last year.

At the weekend, Steve Ballmer, chief executive of Microsoft, tried to win Yahoo! by adding $5 billion to his bid, lifting it to $33 a share. Mr Yang is understood to have argued that he would not accept anything below $38.

Microsoft published a letter sent to Mr Yang at the weekend, detailing its decision to walk away.It also revealed that Mr Yang had threatened to out-source a lucrative part of Yahoo!’s business to Google, its larger rival, if Microsoft tried to make a formal hostile bid. Such a move, Microsoft argued, would have damaged Yahoo!’s business.

Microsoft shares closed 16 cents down at $29.02 last night.

Time Warner and Microsoft declined to comment.

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