In a letter to the company's board, the investment firm proposed a deal Wednesday in which Microsoft would acquire Yahoo's search engine and Yahoo would retain 80 percent of revenue generated by search queries on its own site.
Ivory said Yahoo could get about $15 billion from Microsoft for the search platform alone, a deal it said would give shareholders a value of $24 to $29 per share, or more than double Yahoo stock's closing share price Tuesday of $12.19.
Yahoo shares rose 62 cents, 5.1 percent, to $12.81 in morning trading Wednesday.
Yahoo Chief Executive Jerry Yang said recently that he would resign, a response to shareholder discontent that brewed after Yahoo rebuffed a $47.5 billion takeover offer from Microsoft for the entire company. Before stepping down, Yang said he was still open to some kind of a deal with Microsoft, after antitrust concerns sank Yahoo's planned advertising partnership with Google Inc.
Microsoft CEO Steve Ballmer has said a takeover of Yahoo is off the table but has expressed interest in the company's search business.
In the letter Wednesday, Ivory took Yahoo's board to task for not seeking a deal with Microsoft more aggressively and accused the company of ignoring shareholder interests. The firm holds 21.4 million, or about 1.5 percent, of Yahoo's shares.
"We have regrettably watched the company not only miss-execute operationally, but also mishandle, in our opinion, a bona fide offer from Microsoft to acquire the entire company for $31 per share," the letter said.
The letter also pointed out the rising threat to both Microsoft and Yahoo from the Internet search leader, Google Inc.
"It is widely acknowledged that neither company has kept pace with Google's innovation and investment spending," the letter said. "As a result, both companies appear to have fallen further behind in a business area they have each repeatedly referred to as a top priority."
Ivory said Microsoft's purchase of Yahoo's search engine would help drive up the number of queries in the company's overall search network, thereby spurring more revenue.
The firm estimates Yahoo would lose more than $2 billion of annual revenue from the sale but would gain about $1.6 billion a year in payments from Microsoft, assuming the combined search company takes in 20 percent more in sales. And Ivory argues Yahoo would save about $1 billion a year by handing over operation of the search platform.
Requests for comment at Yahoo at Microsoft were not immediately returned Wednesday.