Activist investor Jeffrey Smith calls on Yahoo to take over AOL Inc

In a letter to Yahoo Inc CEO Marissa Mayer, activist-investor Jeffrey Smith has urged that the company to buy one-time internet star, AOL Inc, and take steps to cut the future taxes on the company's lucrative stake in China's Alibaba Group, the online edition of News-Journal reported.

He also called into question Mayer's $1.3-billion acquisition of an internet blogging service and over two dozen other start ups during the past two years with little to show in return so far.

To add weight to his arguments, Smith said he had built a  ''significant'' stake in Yahoo through Starboard Value LP.

Starboard, the second activist-investor to target Yahoo in the last three years, further added that the company quickly "monetize" its Asian assets which exceeded the enterprise value of its actual business, Reuters reported.

Shares of Yahoo were up 4.4 per cent to close at $40.60, while AOL gained 3.7 per cent to $44.55, both on Nasdaq.

Mayer said in a statement yesterday Yahoo would review the letter.

According to the company, it would provide an update on its capital allocation initiatives during its third-quarter earnings call.

According to Starboard, a former activist investor in AOL, a Yahoo-AOL merger could create up to $1 billion in "synergies" by reducing overlaps in online display advertising and other overhead costs.

Ironfire Capital founder Eric Jackson said he did not think it would happen but he believed Yahoo was now in play.

Commentators say Jackson's statement was intended to put more pressure on Mayer.

Jackson added, between now and four months from now, someone would want to submit a short board slate and they would have a strong case.

He added, Mayer was "really under the gun to create value for shareholders" and also prove she was doing a better job than anyone else could do.

AOL's $3.5-billion market valuation makes the merger viable for Yahoo, which had $9 billion in cash, according to BGC Partners analyst Colin Gillis.

Over two years ago Starboard had bought a stake in AOL, called for a patent sale and tried without success to gain board seats.

It does not hold shares in AOL any longer.

Shares of Yahoo have surged over 150 per cent after Mayer took over in 2012, but according to investors, most of the gains could be attributed to Yahoo's stakes in Chinese e-commerce company Alibaba Group Holding Ltd and in Yahoo Japan, a joint venture with Japanese telecom firm Softbank Corp.