Investor Blasts Yahoo Over Tumblr Strategy, Calls for AOL Merger

Hedge fund pushes for change

Yahoo is under pressure to merge with AOL as an activist Wall Street fund pushed today for big changes at the Internet advertising giant. The hedge fund, Starboard, wrote a letter to Yahoo's board with a list of demands to reinvigorate the business.

The Internet company has been in a rut—some would say for years—but most recently since China's Alibaba went public earlier this month. Yahoo! is part owner of the hot Chinese e-commerce firm, and its stake has been a big part of Yahoo!'s value.

In fact, as Starboard and others have pointed out, Yahoo's main advertising business contributes almost nothing to its share price, while its Alibaba and Yahoo Japan investments exceed the company's $40 billion stock market value.

This perceived lack of value has been a sensitive point for Yahoo leadership throughout the tenure of CEO Marissa Mayer. She has been trying to revive the company for more than two years, acquiring companies like Tumblr, pushing into mobile and bringing on new talent to drive traffic to its Internet properties.

Starboard basically called the Tumblr acquisition—at $1.1 billion—a failure.

"The $1.3 billion spent on [total] acquisitions has clearly not delivered value to shareholders," Starboard wrote in its letter today. The investors said the acquisitions failed to deliver revenue growth and are still losing a "considerable" amount of money.

Starboard is calling for up to $500 million in cuts to Yahoo's advertising operations.

The investors also made the argument for a merger with AOL "even if this may mean accepting AOL as the surviving entity."

Yahoo has faced investor uprisings before, sometimes to great effect. Third Point's Dan Loeb was able to shape the board of directors with his activism in 2011 that eventually paved the way for Mayer to join the company.

Starboard is an investor in AOL and has agitated there, as well. The hedge fund was a driving force behind getting CEO Tim Armstrong to divest from Patch, which was sucking money from the company.

Starboard said it hopes to prevent Yahoo from making more acquisitions after selling its remaining Alibaba shares. Last week, Alibaba raised $25 billion in the largest initial public offering in history, becoming one of the highest-valued tech companies in the world at $220 billion. Yahoo's Alibaba shares are worth close to $40 billion, basically the entire value of Yahoo!'s market capitalization.