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Activist investor pushes for Yahoo-AOL merger

In an open letter to Yahoo CEO Marissa Mayer, the investment management firm Starboard makes its case for the oft-rumored pair-up.

A pair-up between Yahoo and AOL has been an oft-rumored merger. Richard Nieva/CNET

A week after Chinese e-commerce giant Alibaba went public, Yahoo -- which sold a large stake in Alibaba in the offering -- is facing pressure from an activist investor.

Starboard Value, which describes itself as an investment management firm that "seeks to invest in undervalued and underperforming public companies," posted an open letter to Yahoo CEO Marissa Mayer on Friday urging her to buy AOL. Starboard also announced on Friday that it was acquiring a "significant" stake in Yahoo.

"We believe a merger of AOL and Yahoo's core business may be one of the best ways to both fully seize the cost reduction opportunity and also to tax-efficiently monetize Yahoo's noncore equity holdings," the firm wrote.

Neither Yahoo nor Starboard immediately responded to requests for comment.

A tie-up between the two early Internet companies has long been a favorite topic of discussion in the tech industry. In July, the rumor mill churned after Mayer and AOL CEO Tim Armstrong were spotted having drinks at an industry conference. The idea of a merger was also tossed around in 2008, when then-CEO Carol Bartz was in charge.

If it wanted to, Yahoo has the resources to buy AOL. After selling more than 6 percent of its stake in Alibaba in the Chinese company's massive IPO, Yahoo is due a windfall of $8.27 billion before taxes. Yahoo has already promised to return at least half the Alibaba proceeds to shareholders. But along with the cash Yahoo already had on hand, the company has more than enough to buy AOL, which had a market capitalization on Friday of $3.49 billion.

Under Mayer, the company has been focused on refreshing its suite of mobile properties, like Yahoo Sports and Finance, and jolting its ailing online advertising business. In February, the company introduced an ad platform called Gemini, which focuses particularly on native advertising, or ads that look more like editorial content instead of being cordoned off like traditional ads.

Still, revenue has been flat. Last quarter, Yahoo's display ad revenue -- an important financial metric for the company -- slumped 7 percent. Yahoo doesn't break out mobile revenue.

Starboard particularly called out display advertising in its letter. The firm said that it believes AOL's display business is sagging as well and that the two companies could save up to $1 billion by reducing costs in the display business and corporate overhead.

A merger with AOL isn't the only fate that's been rumored for Yahoo. The company has also been mentioned as an acquisition target itself. When asked about the possibility by Bloomberg TV on Alibaba's IPO day last week, neither Alibaba co-founder Jack Ma nor Softbank CEO Masayoshi Son ruled out the idea. Softbank, a Japanese telecom company that has a 32 percent stake in Alibaba, could find Yahoo attractive for the 16 percent stake the Silicon Valley giant still retains in Alibaba.

Update, 3:36 p.m. PT: Yahoo has issued a press release saying the company will "review Starboard's letter carefully and look[s] forward to discussing it with them." Below is Yahoo's entire response:

"We are committed, as an organization, to acting in the best interests of the Company and all of its shareholders. We have maintained, and will continue to maintain, an open dialogue with all of our shareholders. As part of our regular evaluation of Yahoo's strategic initiatives to drive sustainable shareholder value, we will review Starboard's letter carefully and look forward to discussing it with them," said Yahoo's CEO Marissa Mayer.

"Going forward, we have great confidence in the strength of our business. The management team and the Board of Directors remain committed to building value for all shareholders through the continued execution of our strategy, investing in products that will drive sustainable growth: search, communications, digital magazines and video. We continue to leverage our portfolio of world-class products, which include Yahoo Search, Mail, News, Sports, Flickr, Tumblr and advertising solutions among others. Additionally, we will continue to focus on evaluating various capital allocation initiatives, an update to which we plan to provide on our third-quarter earnings call," concluded Mayer.

The Company remains focused on creating shareholder value through its world-class Internet assets, its highly successful investments in leading global Internet companies and the increasing traction in transforming Yahoo into a mobile-first company. In the last two years, Yahoo has more than doubled its average monthly mobile users. Since July of 2012, Yahoo has completed over $6.3 billion in share repurchases.