Tumblr Acquired by Yahoo!

Tumblr for Yahoo!

Yahoo!'s CEO, Marissa Mayer, is making a $1.1 billion bet on Tumblr, a microblogging platform and social networking website, owned and operated by Tumblr, Inc.

The deal that was announced on Monday, May 20, 2013, was Mayer's boldest move since she left Google to lead Yahoo!'s latest comeback attempt. Tumblr's acquisition by Yahoo! marks Yahoo!'s most expensive acquisition since it bought Overture, an online search engine, for $1.3 billion in cash and stock.

"Make sure the integration is just in the back end and nurture (Tumblr’s) independence," says Ryan Jacob, fund manager of Jacob Internet Fund, a Yahoo! shareholder, when asked what advice he would give to Marissa Mayer. "I think Yahoo has to be really careful. It’ll be a mistake to try to subsume it into Yahoo’s bureaucracy."

Mayer told analysts that she is "making a sincere promise to not screw it up."

Tumblr: a Game Changer

David Karp and Marissa Mayer

Yahoo! is paying mostly cash for Tumblr, dipping into what remains of a $7.6 billion windfall reaped from selling about half of its stake in Chinese internet company Alibaba Holdings Group. Acquisition of Tumblr will take about one-fifth of the $5.4 billion in cash that Yahoo! had in its accounts at the end of March 2013.

Mayer praised Tumblr as a fount of creativity that attracts 300 million visitors each month. David Karp, a high school dropout who started Tumblr, will remain in control of the service in an effort to retain the same "irreverence, wit and commitment to empower creators," Yahoo! said.

"David Karp is one of the most inspiring, insightful entrepreneurs that I have ever met," said Mayer, who worked closely with Google co-founders Larry Page and Sergey Brin during her time at the company.

In his statement, Karp predicted Yahoo! would help Tumblr grow even faster as he strives "to make the Internet the ultimate creative canvas."

Tumblr will now play a role in Mayer's attempt to reshape Yahoo! after her highly successful 13-year career at Google, which she helped surpass Yahoo! as the internet's most influential company. Since she joined Yahoo!, Mayer has made her debut by concentrating on redesigning services and bringing in more engineering talent through a series of small acquisitions that have collectively cost less than $50 million.

Yahoo! will still focus on mostly small deals, Mayer said, but "Tumblr is a game changer," she said to analysts.

As popular as Tumblr has become, the service remains unprofitable. That is likely to raise questions about whether Yahoo! paid too much for the deal. Facebook faced similar doubts when the company bought Instagram, a rapidly growing photo sharing site. Facebook initially agreed to pay $1 billion in stock for Instagram, but the value had fallen to $715 million by the time that deal closed.

Mayer's efforts at Yahoo! have been well-received, although most of the 69 percent surge in Yahoo!'s stock price under Mayer's leadership has been driven by the rising value of Yahoo!'s remaining 24 percent in Alibaba. When Alibaba goes public within the next few years, analysts have estimated Yahoo! could collect another $10 billion to $20 billion by selling the rest of its Alibaba's stock.

Mayer said Yahoo! will work with Tumblr to create ads that "are tasteful and seamless." The company expects Tumblr to start increasing Yahoo!'s revenue starting 2014.

Mayer is betting that Tumblr will provide Yahoo! with a captivating hook to reel in more traffic and advertisers on smartphones and tablet computers. That rapidly growing market is expected to become even more important during the next decade.

Yahoo! flirted with potential acquisitions of Google and Facebook in those two companies' early days, only to have the talks unravel because Yahoo! wasn't prepared to pay asking prices that were far below the current market values of Google ($300 billion) and Facebook ($63 billion). Yahoo! also considered buying YouTube in 2006, only to be outbid by Google.

More than half of Tumblr's users connect to the service through the mobile app. Tumblr, which will remain based in New York, has about 175 employees, while Yahoo! has 11,300.

Yahoo! to Social Media

Tumblr will fill Yahoo!'s gap in the social media industry. Yahoo! so far has had to connect its services to Facebook and Twitter to give its users a social networking outlet.

Tumblr to Yahoo! could help the company recapture some of its cachet with teens and young adults, a demographic that has become tougher for Yahoo! to reach in recent years as it fell behind the technological curve.

Tumblr also runs one of the world's busiest websites, featuring 75 million daily posts about almost every topics people have in mind. Advertising has been a missing piece so far as Tumblr, like many online services in their early stages, focused on building a loyal audience before turning attention to make money.

The deal also has some symbolic significance for Yahoo!, an internet company that had spent much of the past decade drifting under different management teams while Google Inc. overtook it in size and influence. At the same time, newcomers such as Facebook and Twitter began to command attention.

While Facebook has turned into a mainstream social network where everyone connects with family and friends, Tumblr has become one of the places where the young people hang out. The service says it has amassed more than 50 billion posts from 108 million blogs.

Having its own social networking service will give Yahoo! more insights into the things that people like. That data, in turn, will help Yahoo! sell more ads and accelerate its revenue growth. After three successive years of declines, Yahoo!'s revenue rose just a little last year, but lagged far behind the growth of Google and Facebook. Mayer has said to dedicate herself to bring Yahoo!'s revenue growth back to at least the level of the overall internet ad market.

Karp's cut from the Yahoo deal is about $275 million. Most of the rest of the money will be paid to the venture capitalists that invested about $125 million into Tumblr. That list includes Spark Capital, Sequoia Capital, Greylock Partners, Union Square Ventures and Insight Venture Partners.