Learn more about Yahoo and Marissa Mayer from Fortune’s video team:

Starboard wants a merger with AOL (AOL), and doesn’t like the rumors it has been hearing about other big mergers. Fortune wrote about that news here, but here’s the full letter Starboard issued:

Marissa A. Mayer, President and CEO
Yahoo! Inc.
701 First Avenue
Sunnyvale, California
94089

cc: Board of Directors

Dear Marissa,

We appreciate the constructive and on-going dialogue we have had with you, your management team and certain members of the Board of Directors (the “Board”) regarding the extremely compelling opportunities to create value at Yahoo! Inc. (“Yahoo” or the “Company”). However, we have recently become increasingly concerned due to the growing number of media reports indicating Yahoo’s interest in doing large-scale acquisitions. The latest reports speculate that Yahoo may be considering an acquisition of cable assets including Scripps Networks Interactive and Time Warner’s CNN. Our concerns that these media reports may have some truth are exacerbated as it has now been more than sixty days since the IPO of Alibaba, and Yahoo is now free to disclose its intentions with regard to its shares of Alibaba. However, to date, no announcement has been made regarding Yahoo’s plans for a tax-efficient separation of its non-core minority equity interests.

On a related note, within the past week, new speculation has emerged that Yahoo is considering a cash-rich split-off as a structure to separate its non-core minority equity interests. 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. As we have repeatedly explained, we believe a cash-rich split-off to separate Yahoo’s non-core minority equity interests has serious shortcomings:

i) The market value of the ‘active trade or businesses’ Yahoo would receive as part of the consideration in exchange for its interests in Alibaba or Yahoo Japan would be difficult to ascertain objectively, and could be of questionable value to Yahoo shareholders;

ii) The total consideration that Yahoo would receive in exchange for the Alibaba and Yahoo Japan stakes would likely be lower than the valuation that those assets would garner if they were traded as separate public entities;

ii) The total consideration that Yahoo would receive in exchange for the Alibaba and Yahoo Japan stakes would likely be lower than the valuation that those assets would garner if they were traded as separate public entities;

iv) It would introduce unnecessary transaction complexities and execution risks given the required third party participation.

As we have made clear in our prior discussions and letters, separating the non-core minority equity interests in the most tax-efficient, value maximizing, and shareholder friendly manner must be Yahoo’s top priority. Recent discussions with large shareholders of Yahoo, some of whom have reached out directly to us to express their serious concerns with the rumors pervading the market, corroborate our belief that shareholders expect the Company to execute a tax-efficient separation (i.e. spin-offs) of both the Alibaba and Yahoo Japan stakes.

Further, we continue to believe that Yahoo must significantly reduce costs to improve profitability in its core business and should be considering a combination with AOL. A combination with AOL, structured properly, could accomplish all of these goals by allowing for: (i) a tax-efficient separation of the non-core minority equity investments; (ii) tremendous cost synergies of between $1 billion and $1.5 billion; and (iii) a strong growth platform given AOL’s progress in mobile and video advertising.

We understand that you are not in a position to comment on media speculation. However, we expect that you and the Board will heed the advice of shareholders by expeditiously announcing your intentions regarding both of Yahoo’s non-core minority equity investments and other actions to enhance shareholder value.

Should you instead choose to proceed down a different path by pursuing large acquisitions and/or a cash-rich split, both of which have been speculated, such actions would be a clear indication to us that significant leadership change is required at Yahoo. We hope our concerns are unfounded and would like to continue our constructive dialogue. We eagerly await the conclusion of your review and the announcement of your intentions.

Best Regards,

Jeffrey C. Smith
Managing Member
Starboard Value LP