Yahoo CEO Marissa Mayer acknowledged the letter Friday evening.
"As part of our regular evaluation of Yahoo's strategic initiatives to drive sustainable shareholder value, we will review Starboard's letter carefully and look forward to discussing it with them," she said, in a statement.
Starboard, which recently went after Darden for wasting money at its Olive Garden restaurants, said a tie-up between Yahoo and AOL could "offer synergies of up to $1 billion" and reduce corporate overhead cost.
Starboard said it had acquired a significant stake in Yahoo, adding that a possible AOL deal, along with other recommendations, would unlock tremendous value for shareholders.
AOL shares jumped as much as 6 percent after the news before easing, while Yahoo rose about 4 percent.