Yahoo and AOL have been urged to merge by an activist investor, presenting an interesting potential tie up between two troubled internet giants.
Yahoo and AOL shares are up sharply after the activist investor group wrote a letter demanding the two explore combining into one company.
Starboard, the hedge fund which recently criticised US restauarant chain Olive Garden, is also urging Yahoo to stop spending so much money on acquisitions, slash expenses and monetize its holdings in Alibaba and Yahoo Japan.
In its letter, Starboard said it feels Yahoo’s core business is “deeply undervalued” and that the company would be better off selling the rest of its Alibaba stake as well as an investment in Yahoo Japan in a tax-efficient manner.
As for an AOL deal, Starboard estimates there could be $1 billion in cost savings through a combination of the two companies.
Starboard, which says it has a “significant” ownership stake in Yahoo, made the demands in a letter it delivered to Yahoo CEO Marissa Mayer and the board of directors on Friday.
In it, Starboard says Yahoo spent $1.3 billion in capital since the second quarter of 2012, while revenue has barely budged and earnings have decreased. The firm said it looked forward to “engaging directly” with Yahoo.
“We believe that the execution of these initiatives would produce tremendous value for shareholders,” the letter says.
In a statement, Mayer said: “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.”
Speculation about a Yahoo-AOL merger has been around for years since AOL was spun off from Time Warner in 2009.
The chatter picked up steam once Mayer joined Yahoo from Google since AOL CEO Tim Armstrong is also a Google veteran.
The rumors surfaced again last week as Yahoo prepared to cash in on part of its stake in Chinese e-commerce company Alibaba. Yahoo is estimated to have raised more than $5 billion after taxes from selling some of its Alibaba stock. AOL is worth about $3.5 billion.