Yahoo Inc will buy blogging service Tumblr for $1.1 billion cash, giving the Internet pioneer a much-needed social media platform to reach a younger generation of users and breathe new life into its ailing brand.
The deal, announced on Monday, is a bold bet by Yahoo Chief Executive Marissa Mayer to revitalize the company by co-opting a Web property with strong visitor traffic but little revenue.
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The combination of Yahoo and Tumblr creates an online powerhouse with roughly one billion users, which will draw in more advertisers and help Yahoo keep visitors on its properties for longer periods of time, Mayer told Reuters in an interview.
Analysts say Yahoo appeared to be overpaying for a business that has never posted a profit, makes a fraction of Yahoo's sales, and may not contribute significantly to revenue for years. But the company, rebuffed by the French government when it tried to pay $1 billion for video site Dailymotion earlier this year, had to do something to plug a hole in its social media efforts.
Yahoo made clear it was sensitive to concerns that it might damage Tumblr by making it less irreverent or more corporate.
"Per the agreement and our promise not to screw it up, Tumblr will be independently operated as a separate business," Yahoo said in a statement.
The deal will make Tumblr founder and CEO David Karp, 26, a multimillionaire.
Tumblr is one of the Web's most popular hubs of so-called user-generated content, drawing young people who use the platform to post pictures and text. It has more than 100 million blogs in its network, ranging from "White Men Wearing Google Glass" - a collection of photos poking fun at the early adopters of the wearable computing devices - to housing-focused "The Worst Room."
Though Yahoo remains one of the Web's most popular destinations, it has seen its revenue shrink in recent years as consumers and advertisers favor rivals such as Google Inc and Facebook Inc. The deal is expected to increase Yahoo's audience by 50 percent.
The acquisition, which will use up about a fifth of Yahoo's $5.4 billion in cash and marketable securities, is the largest by far since Mayer took the reins in July with the goal of reversing a long decline in Yahoo's business and Web traffic.
RBC Capital Markets analyst Mark Mahaney called it a "long-shot/long-term investment" but one that fits into Mayer's turnaround strategy.
"(Yahoo's) fundamentals have been subpar for numerous years, in part because of the company's missing presence in Social and Mobile. Tumblr may help (Yahoo) develop that presence," Mahaney said in a note.
While Tumblr is certainly popular - it has tens of millions of monthly unique visitors in the U.S. - analysts questioned what kind of contribution it will make to Yahoo revenue, since advertising on the site is in its nascent stages.
Media reports have pegged Tumblr's 2012 revenue at $13 million. The privately held company, based in Manhattan, does not disclose its financial results.
Yahoo expects that Tumblr will help boost revenue by 2014, Ken Goldman, Yahoo's chief financial officer, said on a call with analysts. He did not provide specific numbers.
"Even if revenue was $100 million, it means Yahoo paid 10 times revenue," said BGC Financial analyst Colin Gillis. "Ten times is what you pay to date the belle of the ball. It's on the outer bands of M&A."
Yahoo could quickly boost Tumblr's revenue by combining the website with its own sales force, said Pivotal Research Group analyst Brian Wieser. But loading Tumblr up with banner ads risks alienating its users and probably wouldn't provide a significant lift to Yahoo's overall revenue, he said.
"It's not clear that this deal will be favorable from a return-on-capital perspective," Wieser said. "One billion (dollars) for one company is a big bet."
Gillis and Wieser were contacted on Sunday after the deal was reported by the online publication All Things D.
Mayer, on the conference call, described the Tumblr deal as an exception and said Yahoo was not necessarily planning lots of similarly sized deals.
Yahoo is one of several companies that have coughed up considerable money for buzz-worthy start-ups that hold promise. Facebook bought the popular social media photo site Instagram for $1 billion last year. In 2006, Google paid $1.6 billion for YouTube.
Yahoo's track record in acquisitions is patchy. Its $3 billion-plus purchase of Geocities - a free service that hosted personal home pages for consumers and once ranked among the most-trafficked websites - stands among the most glaring of its failed deals. Yahoo shut down the service in 2009.
"It's not lost on me that there were some large acquisitions done in Yahoo's history that did not go well," Mayer said in the interview with Reuters. She said Yahoo now has a completely different management team, committed to making the Tumblr deal work.
The Tumblr team will remain in New York, Mayer noted, partly because she believes the most successful deals in the Internet industry, such as Google's YouTube acquisition, have thrived by letting the acquired company operate somewhat independently.
Shares of Yahoo were up 27 cents, or 1 percent, at $26.78 in afternoon trading. Through Friday's close, the shares had risen 70 percent since Mayer became CEO.
One question Yahoo may have to address is Tumblr's reputation as a home for pornographic blogs. At one point in 2009, about 80 percent of Tumblr's top sites had something to do with adult content. Today that number is closer to 5 percent, according to Quantcast data, but the old image lingers.
Mayer, on the conference call, brushed off concerns that Tumblr has content that might not appeal to advertisers, saying the ability to reach more people is "really exciting." She said Yahoo's targeting tools would allow advertisers to zero in on specific demographics and content.
One area where Yahoo plans to ramp up advertising: Tumblr's dashboard, the main landing point, akin to a newsfeed.
Dealing with that and other issues may fall to Karp, who founded Tumblr in 2007 and will remain CEO.
Karp, a self-taught programmer who left high school in favor of home schooling, did not take part in Mayer's conference call. Media reports have suggested his take in the sale of Tumblr would top $200 million.
In a 2012 interview with The Guardian, Karp seemed to be less interested in money than in Tumblr's prominence.
"There are a lot of rich people in the world. There are very few people who have the privilege of getting to invent things that billions of people use," he said.