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A hedge fund is urging Yahoo! to form a "strategic combination" with fellow internet dinosaur AOL – just as Yahoo! announced it was killing off its founding feature, created about 20 years ago.

In an open letter to Yahoo! CEO Marissa Mayer, investment house Starboard Value asked her to consider making a number of moves it thinks will produce better payouts for shareholders.

Among the ideas outlined in the letter would be a possible merger with AOL. The investment firm, which holds a stake in Yahoo!, said it thinks a Borg'd Yahoo!-AOL would be a force to be reckoned with online.

"Based on our analysis, we believe that a combination of Yahoo and AOL could offer synergies of up to $1 billion by significantly reducing the cost overlaps in their Display advertising businesses as well as synergies in corporate overhead," the letter reads.

"Importantly, we believe the combined entity would be able to more successfully navigate the ongoing industry changes, such as the growth of programmatic advertising and migration to mobile."

The letter goes so far as to suggest that Yahoo! could even take AOL's name and shut down most of its operations, if need be.

AOL, of course, was the subject of one of the most disastrous mergers in history. In 2000, the company's $160bn deal with Time Warner marked the high point of the dot-com boom. Over the next ten years, it would prove to be a dreadful move for both sides as AOL's dialup business eroded with the rise of broadband.

Yahoo! has similarly been wandering the web's wilderness after it was overthrown by Google. Efforts to relaunch the firm have stumbled as a parade of CEOs, including Terry Semel, Jerry Yang and Carol Bartz, have tried to return the biz to its former glory.

Though Starboard is all for an AOL tie up, the company wants to slam the brakes on other acquisitions. The hedge fund said it would seek to halt Yahoo!'s strategy of adding new brands – remember, it owns Flickr and Tumblr – a tactic that Starboard claims has cost Yahoo! $1.3bn in the past two years.

One of the primary problems, says Starboard, is that the core of Yahoo!'s web business is still failing to generate any money.

"Although Yahoo's stock price performance over the past few years has been strong, we believe the main reason for this performance has been the significant increase in value of Yahoo's stake in Alibaba," the firm said.

"The appreciation in Alibaba's valuation, which Yahoo purchased in 2005, has masked the poor performance of Yahoo's core business."

It seems, perhaps, that Yahoo! is already thinking along those lines. The company today announced the closing of three products: Yahoo Education, Qwiki and the Yahoo Directory.

Directory was Yahoo!'s first ever product and the company's core business in its early days, starting life as "Jerry's Guide to the Web." Yahoo said that it would shut down the service effective December 31 this year.

As for the letter itself, Yahoo appears to have politely declined Starboard's suggestions.

"Going forward, we have great confidence in the strength of our business," Meyer said in a company statement.

"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." ®




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