GOOGLE is to be handed a say in the future ownership of AOL, Time Warner’s troubled internet business, in return for agreeing to buy a 5 per cent stake for $1 billion (£570 million).

The world’s leading search engine will be given the right to force Time Warner to float AOL in 2008 — unless the media giant buys out Google at a fair market value in cash or stock.

The deal was announced late last night after the Time Warner board had met to give formal approval to a transaction that will see a transformation of Google’s simple search strategy. Time Warner has been holding talks with a group of search engine providers as part of an attempt to extract value from — and drive traffic to — AOL. Last week it opted to do a deal with Google instead of Microsoft.

AOL already uses Google’s technology to provide internet search, and on some estimates it generates as much as $500 million in annual revenue for the search engine, whose total turnover was $4.2 billion in this year’s first nine months.

Had Time Warner switched to Microsoft, the owner of MSN Search, it would have given a major boost to one of Google’s rivals, creating a powerful third competitor to Google and Yahoo!, its main rival. Google is understood to be planning to introduce banner advertisements on its website for the first time — branded by AOL — a major shift for a company that built its business on a simple home page and low-key advertising, which was easy for surfers to download.

AOL will also receive help from Google in optimising its site, which should boost the ranking of its content in response to a search query. Although Google has created a lucrative business in selling adverts, most people click on one of the general search results rather than an advert to find what is required.

Anthony Noto, an analyst for Goldman Sachs, gave warning that there could be “a backlash for Google if it gives special treatment to AOL to help it improve its search placement and allows it to be the only branded advertiser on its site”.

He said that negative press coverage could persuade surfers to conduct their searches elsewhere if they felt the results were no longer objective.

AOL was briefly big enough to buy Time Warner as part of the “deal of the century” that created the first integrated internet and media group.

The once fast-growing dial-up internet provider lost ground as subscribers switched to faster broadband services supplied by cable and telecoms companies.

Under Richard Parsons, Time Warner’s chief executive, the company has tried to reinvent AOL as a popular internet destination, making money by selling advertising. However, growth in advertising has not been sufficient to stanch the losses from subscriber defections. In the first nine months AOL’s turnover declined by 3.6 per cent to $6.27 billion.

Time Warner hopes the deal will help to stave off a rebellion led by Carl Icahn, the activist investor, who controls about 3.1 per cent of the stock. Mr Icahn wants to see AOL broken up into four and called the Google deal “a disastrous decision”.

Ahead of the expected announcement, Time Warner shares closed down 1.16 per cent in New York at $17.74 last night.

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