Starboard Value is continuing its activist campaign against Yahoo Inc with an open letter to Yahoo CEO Marissa Mayer that pushes for a Yahoo-AOL merger and issues a veiled threat that a “significant leadership change” could be necessary if Yahoo doesn’t comply.

Starboard Value: Yahoo should consider a merger with AOL

“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,” writes Starboard Value managing member Jeffrey Smith. “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.”

'Leadership Change' May Be Necessary At Yahoo, Says Starboard Value

Starboard worried about ‘value destructive acquisitions’

The letter references an October 27 meeting, just a few weeks after Starboard’s big win over Darden Restaurants’ former board, where the hedge fund met with Mayer to talk about what should be done with the company’s large, valuable stake in Alibaba now that the Chinese search giant has gone public. Starboard’s concern is that Yahoo will use its Alibaba stock to generate cash to pay for even more “large and potentially value destructive acquisitions” (something of a staple during Mayer’s time at the top). The letter specifically mentions rumors that Yahoo may buy cable assets from Scripps Networks Interactive or Time Warner’s CNN among others, and claims that Mayer agreed with Starboard’s position when they met (we’ll have to wait to get Mayer’s side of the story).

Yahoo-AOL merger sounds like a throwback to the 90s

The tone of the letter is still fairly polite, but things could easily ramp up from here, especially if Mayer confirms the rumors that she wants to use Alibaba stock for more acquisitions. Yahoo stock has done well recently because of its stake in Alibaba, but there has been some frustration that Mayer’s string of acquisitions haven’t transformed the company as intended.

Even if the Yahoo-AOL merger makes strategic sense (Starboard will probably issue a full explanation behind the recommendation at some point), from a pop culture perspective it sounds bad. The companies are both faded tech giants that never managed to recover the market positions they held in the late 90s, and is Starboard intends to do a big media push it will need to get people past the idea that this would be a marriage of two over-the-hill tech companies.