[Update] Sorry, But Could You Think Of A Worse Combination Than These Two Brands?

It looks like some folks want Yahoo to spend its Alibaba money on AOL (and, by extension, us.*)

As you’ve probably read elsewhere, activist investor Starboard Value, has sent an open letter to Marissa Mayer (Hi, potential new boss… Loved your work at Disrupt), imploring her to just pull the trigger already and make the corporate marriage with Tim Armstrong official (seriously, this will they, won’t they stuff is getting ridiculous.)

In its letter, Starboard called out Mayer for Yahoo’s “aggressive acquisition strategy which has resulted in $1.3 billion of capital spent since Q2 2012 while consolidated revenues have remained stagnant and EBITDA has materially decreased.” Ouch. I guess this means the Yahoo Acquihire river is about to dry up?

The savaging continues in the investor’s discussion of the Alibaba sale. “Even after the previous ill-timed and tax-inefficient sales of Alibaba stock, Yahoo’s remaining stake in Alibaba is currently worth more than the entire enterprise value of Yahoo. When adding Yahoo Japan, these two minority equity interests are worth approximately $11 billion, or $11 per share more than the current enterprise value of the Company.”

So that’s problematic, but the letter continues:

… investors currently expect Yahoo to continue its past practices of (a) monetizing its non-core minority equity stakes in a tax inefficient manner and (b) using the cash proceeds from such sales to acquire businesses at massive valuations with seemingly little to no regard for profitability and return on capital. If these two issues are addressed such that the non-core minority equity stakes are monetized in a tax efficient manner and Yahoo’s aggressive acquisition strategy is halted, Yahoo’s current stock price would imply negative $11 billion of value for Yahoo’s core business.

No one would argue that Yahoo is undervalued when you consider all of the various parts of the business — and Starboard itself calls Wall Street’s nickel and diming of Yahoo “nonsensical” — but it’s a clear indicator that faith in Mayer’s vision for Yahoo has waned.

So how do investors get at that value? Starboard believes the answer lies in a tie up with AOL. Because, as Starboard’s investor writes, the acquisitions haven’t been working.

“These acquisitions, on a combined basis, have failed to deliver material revenue growth. In fact, we believe that a number of the acquired start-ups have actually been shut down after being acquired by Yahoo,” Starboard writes.

The ad display business is leaking money at both businesses, actually, but through the amazing power of corporate “synergies” the two combined companies could realize $1 billion in value from cost overlaps in display business as well as “synergies” in corporate overhead.

Beyond the cost-cutting, a combined AOL-Yahoo entity would bring the dream of the 90s beyond Portland and could revivify two moribund holdovers from the dot-com days. Consider a Yahoo-AOL tie-up the culmination of Web 2.0. It could even herald the return of the mack.

As Starboard notes:

we believe a combination could also lead to revenue growth opportunities given the broader user base, higher quality content, better technology assets, and enhanced relationships with advertising agencies.

Interestingly for me, for Starboard, and for all other TC staffers, the activist investor thinks that if AOL and Yahoo were to merge, AOL would be the surviving entity… although for Starboard it’s more about tax efficiencies than about the shining prose we offer here.

Not everyone thinks that a merger is a silver bullet for either company. As one of our other reporters asked in a discussion thread on this: “Sorry, can you think of a worse combination than these two brands?”

I actually can, but it’s hard to pin one down right now. There are valid reasons for the tie-up, especially the amount of advertising real estate that the two would command as a single entity.

It’s important to point out that this is not really a new idea. Analysts, investors, and executives have been mulling this combination for years, but the two companies have never been able to get a deal to the finish line.

In part, that’s because it doesn’t necessarily solve any of the long-term problems at either business. Ben Schachter at Macquarie Capital told me that he’s more worried about what happens to Yahoo with search than with advertising. “Our main longterm concern is actually the search business,” he said. “Given the changes through how people access search… does the whole notion of Yahoo search make any sense?” Also, both companies are also pretty terrible at mobile, which Mayer admitted to on our stage in New York.

If Mayer wants to, she can still find solace in the fact that Starboard tried playing this game before. And it didn’t go so well.

Ultimately, no one knows whether this is just more idle speculation or if a more robust activist investment community will goad Mayer and Armstrong into action. Although… either one is more than welcome to share their thoughts. I’m @jshieber on twitter. Or jonathan.shieber@aol.com (the mail app is still really buggy on mobile, guys.)