TIME WARNER is in discussions with Microsoft over an internet alliance that could lead to the world’s biggest software company buying a stake in AOL, the largest internet service provider.

The two companies are understood to be eager to forge closer ties between Microsoft’s MSN internet division and AOL, a unit of Time Warner that is suffering from falling subscriber numbers and is restructuring itself to emphasise online content rather than web access.

People familiar with the situation played down reports that a deal was imminent, but refused to rule out Microsoft taking equity in AOL.

“There have been talks on ways Microsoft and AOL assets can be better leveraged and they’ve taken place over the normal course of business,” one source said.

Time Warner and Microsoft refused to comment.

The discussions started about two years ago after the companies settled a longrunning antitrust suit that AOL filed against Microsoft. At the time the two sides agreed “to collaborate on long-term digital media initiatives that will accelerate the adoption of digital content”.

Time Warner, whose assets range from film studios to Time magazine, is also thought to have held discussions over possible deals with Yahoo! and Google, the search engines.

AOL, once a titan of Wall Street during the internet bubble when it merged with Time Warner in a record $200 billion deal, is now a thorn in the side of its parent’s managers.

The group has seen the number of online subscribers decline from 26 million in 2003 to less than 22 million as subscribers desert its dial-up internet service for rival broadband offerings. It is seeking to offset the losses by shaping itself as a destination for all internet users, thereby boosting advertising revenues.

But the returns are not flowing as quickly as some had expected, and Time Warner is under pressure from shareholders to boost its stock price, which has fallen by 70 per cent over the past five years.

Carl Icahn, the billionaire shareholder activist, has demanded that the company raise its stock buyback programme to $20 billion (£11 billion) from Time Warner’s existing commitments of up to $5 billion and spin off the cable division.

He said this week that he planned to seek one or more shareholder-nominated board seats at the company to force the changes. Shares in Time Warner closed up 58 cents, or 3.24 per cent, at $18.50 on the New York Stock Exchange yesterday.

One investor was cheered by the talks, saying that any move that could add value to the share price from improvements at AOL would be applauded.

“Management is not asleep at the switch,” Larry Haverty, a portfolio manager at Gabelli Asset Management, which has a stake of about $286 million in Time Warner, said. “Anything you can do to move the needle in that direction is terrific for shareholders.”

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