Yahoo! is seeking to restart merger talks with AOL as a means of defending itself against the $45 billion (£23 billion) hostile bid approach from Microsoft, The Times has learnt.

It is understood that Yahoo! and its team of advisers from Goldman Sachs and Lehman Brothers, the US investment banks, have spent the past week evaluating possible tie-ups with media and technology firms that would save it from being swallowed by Microsoft.

It is also understood that one option being explored is to restart merger talks with AOL, the online business owned by Time Warner. Tie-ups with groups such as Google or Disney are also being considered. Although Yahoo! and AOL previously failed to join forces because of differences over price, it is hoped that the urgency created by an unwelcome approach from Microsoft and an impending economic downturn will spur the two into new talks. Google, which offered support to Yahoo! when the Microsoft approach was made public, also has a 5 per cent stake in AOL.

Jerry Yang, co-founder of Yahoo!, will today tell Wall Street that his board has rejected the software giant’s cash-and-shares proposal because it significantly undervalues the company. It is believed that the Yahoo! board will not even consider starting talks with Microsoft unless the suitor group offers at least $12 billion more, representing a share price value of more than $40.

Currently, Microsoft has proposed paying $31 in cash and shares, valuing Yahoo! at just under $45 billion. Microsoft had proposed to pay Yahoo! shareholders up to half in cash and the rest with Microsoft shares.

A source close to Yahoo!’s thinking told The Times: “All they [Microsoft] are trying to do is pick off the company on the cheap. They’re trying to steal it. And the board is not going to let that happen. They have gone for a valuation that reflects the five-year low of the stock.”

The source added: “It would have to be in the 40s to start talking, and we would have to get over regulatory issues. It would have to be an offer that would give Jerry Yang something to stand on a podium and smile about.”

Yahoo! came to its decision at a meeting of its board on Friday night.The rejection may raise eyebrows, since Microsoft’s bid proposal valued Yahoo! at a 62 per cent premium to its closing price the day before the offer was made public on February 1.

Such a rejection would suggest that Mr Yang is prepared to argue to shareholders that he is capable of boosting Yahoo!’s share price by at least 62 per cent if the company stays independent. It is understood that today’s announcement will not include any firm talks with other media firms.

Yahoo! has suffered eight consecutive quarters of profit decline. Critically, it has also lost part of its share of the $40 billion online advertising market to Google, its dominant rival.

Microsoft is thought to be trying to engage Yahoo! shareholders in some form of discussion. It is also understood to be considering a proxy fight in the next month, in which it plans to oust most of the Yahoo! board and replace key executives with its own choice of management team.

That process — open to Microsoft as a shareholder in Yahoo! — is understood to be the last resort for the computer group if Mr Yang refuses to start serious merger talks. Any shareholder in Yahoo! can nominate executives by next month. Nominations would then be voted on by all shareholders.

Microsoft is desperate to take over Yahoo! because of the threat that Google’s dominance of the online search advertising market poses to the computer company’s future. Last year, after long discussions about a merger between the two, Yahoo! declared that it was not for sale. However, it did agree to draw up proposals about how the two could co-operate to fight Google more effectively.

Yahoo! is considered by Microsoft to have reneged on its pledge and Microsoft has become increasingly frustrated in the past 12 months as Google has grown stronger and Yahoo! has lost market share and been forced to cut 1,000 jobs.