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Starboard tells Yahoo: No big acquisitions, but merge with AOL

Starboard Value LP, an activist investor that recently acquired a stake in Yahoo, has sent a new letter to CEO Marissa Mayer lamenting rumors that the Internet company is looking into a large deal for a major cable network.

The investor, which disclosed a “significant ownership stake” in September, is concerned about recent reports that speculate Yahoo (YHOO) could be considering a bold deal to buy either news network CNN, or a media property such as Scripps Networks Interactive (SNI). Additionally, Starboard said it was worried about rumors that Yahoo could also be considering a cash-rich, split off to separate the company’s non-core minority interests to unlock the value of Yahoo’s interests in Alibaba (BABA), or Yahoo Japan.

“The resurfacing of rumors about a cash rich split-off at this juncture is particularly troubling given your acknowledgment at our meeting with you on October 27th that this option would be clearly inferior to a spin-off structure or other available alternatives to unlock the full value of the stakes in Alibaba and Yahoo Japan,” Starboard said in its letter addressed to Mayer.

The letter was attributed to Starboard co-founder and CEO Jeffrey Smith, the subject of a recent Fortune profile. A Yahoo representative wasn’t immediately available to comment on Starboard’s latest public statement.

Starboard holds 7.7 million shares of Yahoo and 1.9 million shares of AOL, according to a November regulatory filing of the investor’s investments as of September 30″

Mayer is facing pressure in the wake of Alibaba’s IPO in September, as analysts and investors have raised concerns about the company’s ability to turn around its core business. Additionally, while Yahoo still owns about 400 million shares of Alibaba, investors don’t need to invest in Yahoo to get access to Alibaba. They can directly invest in Alibaba if they choose to do so. And while Yahoo has announced some high-profile acquisitions, including a $1.1 billion deal to buy Tumblr, the company’s ad business has remained challenged.

Starboard has advised that Yahoo consider a potential deal with AOL (AOL). In the investor’s letter on Thursday, it affirmed that that combination is desirable, citing a chance to reduce costs and improve profitability at Yahoo’s core business.

Starboard, which said it understands that Mayer is “not in a position to comment on media speculation,” is calling on CEO and her board to “expeditiously” announce her intentions regarding Yahoo’s equity investments and other actions to boost shareholder value.

Separately, Starboard scored a victory on Thursday in another activist position it took last year, as MeadWestvaco (MWV) heeded the investor’s call to separate its specialty-chemicals business.