(Reuters) - Yahoo (NASDAQ:YHOO) Inc shareholder Starboard Value LP said the company's spinoff of its stake in Alibaba (NYSE:BABA) Group Holding Ltd was a "good first step" but it could do more, including a share buyback of up to $4 billion.
"Yahoo is in need of a major overhaul," the activist investor wrote in a letter to Yahoo's board on Monday.
Starboard recommended that Yahoo aggressively cut costs, buy back $3.5 billion-$4.0 billion of shares and separate the Yahoo Japan stake in a tax-efficient manner.
The steps could unlock $11.1 billion of shareholder value, or about $11.70 per share, Starboard said.
Yahoo, which is trying to reverse a multi-year decline in revenue, has faced increasing investor pressure more than two years after Chief Executive Marissa Mayer took the reins to lead a comeback plan.
Yahoo has spent about $4.8 billion on acquisitions and product development since the current management team took over. Starboard said Yahoo can reduce $330 to $570 million in costs per year.
Yahoo's operating costs have gone up 7 percent in 2014.
Yahoo said in January it planned to spin off its 15 percent stake in Alibaba, responding to pressure to hand over to shareholders its prized e-commerce investment.
Starboard, which owned a 0.8 percent stake in Yahoo as of November, did not mention anything about its previous push for Yahoo to combine with AOL Inc.
Starboard urged Yahoo to consider merging with AOL in September and January, saying that a deal could create up to $1 billion in "synergies" by reducing overlaps in online display advertising and other overhead costs.
Yahoo, whose shares were down 1 percent at $42.99 in morning trading, was not immediately available for comment.
Yahoo shares have risen about 12 percent since Starboard disclosed a stake in the company in September.