Yahoo’s $1.1bn gamble on Tumblr

Yahoo said it is acquiring blogging service Tumblr for $1.1bn (€850m) cash, a bold bet by chief executive Marissa Mayer to revitalise the struggling internet pioneer by co-opting a web property with strong visitor traffic but little revenue.

The acquisition nets David Karp, 26, a high school dropout who started Tumblr six years ago, about $275m.

He signed off his own message to Tumblr members yesterday with “fuck yeah”.

He will remain CEO.

The deal, which will use about a fifth of Yahoo’s $5.4bn in cash and marketable securities, is the largest by far since Mayer took the reins in July seeking to reverse a multi-year decline in Yahoo’s business and web traffic.

“Per the agreement and our promise not to screw it up, Tumblr will be independently operated as a separate business,” Yahoo said.

Tumblr is one of the web’s most popular hubs of user-generated content.

The deal will provide Yahoo with a much-needed platform in social media to reach a younger generation of users less tied to Yahoo’s traditional web portal and email services.

Analysts said Yahoo was paying a hefty premium. Media reports have pegged Tumblr’s 2012 revenue at $13m.

The privately-held company, based in Manhattan, does not disclose its financial results.

“Even if revenue was $100m, 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 favourable from a return-on-capital perspective,” Wieser said. “$1bn for one company is a big bet.”

Yahoo remains one of the web’s most popular destinations, with hundreds of millions of monthly users, but the company has seen its revenue shrink in recent years as consumers and advertisers favour rivals such as Google and Facebook.

Yahoo said the acquisition is expected to increase its audience by 50% to more than a billion monthly visitors.

Karp, in a statement to “the Tumblr community,” said, “Our team isn’t changing. Our roadmap isn’t changing. And our mission — to empower creators to make their best work and get it in front of the audience they deserve — certainly isn’t changing.

“But we’re elated to have the support of Yahoo! and their team who share our dream to make the internet the ultimate creative canvas.” The deal is expected to close in the second half of the year.

A survey this year conducted by the online data group Survata found Tumblr more popular than Facebook among those aged 13 to 25.

Founded in 2007 and headquartered in New York, Tumblr says it has more than 108m blogs, 50bn postings in 12 languages and 175 employees. The website ranking site Alexa lists Tumblr as number 32 in terms of global popularity.

Yahoo’s acquisition will deliver a jackpot to Karp, who dropped out of high school to concentrate on computer programming.

He ended up being home schooled while taking classes in Japanese and working on gambling software.

Later, he became a product executive at a parenting website called UrbanBaby. After CNet bought the site in 2006, Karp set up his own development service called “Davidville” before deciding to create an outlet for personal expression — an endeavour that hatched Tumblr.


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