Yahoo faces pressure from investor urging AOL takeover, better management of Alibaba stake

An activist investor is urging Yahoo to buy rival AOL to help the long-struggling Internet companies to become more competitive in a digital advertising market currently dominated by Google and Facebook.

Jeffrey Smith, who heads Starboard Value LP, outlined his rationale for the AOL Inc. deal in a Friday letter to Yahoo Inc. CEO Marissa Mayer and the company's board of directors.

The letter says Starboard has accumulated a "significant" stake in Yahoo, without providing specifics.

Smith fired his volley at Yahoo just a week after the Sunnyvale, California, company reaped a $9.5 billion windfall by selling a chunk of its holdings in China's Alibaba Group.

Yahoo still holds a 15 percent stake in Alibaba worth about $34 billion, an asset that Smith says need to be better managed.