Yahoo takes big leap with $1.1B deal for Tumblr
May 20, 2013 1:55 PM (ET)
By MICHAEL LIEDTKE
Associated Press
http://apnews.myway.com//article/20130520/DA6D675G0.html
SAN FRANCISCO (AP) - Yahoo is buying online blogging forum Tumblr for
$1.1 billion as CEO Marissa Mayer tries to rejuvenate an Internet
pioneer that had fallen behind the times.
The deal announced Monday is Mayer's boldest move since she left Google
10 months ago to lead Yahoo's latest comeback attempt. It marks Yahoo's
most expensive acquisition since the Sunnyvale, Calif., company bought
online search engine Overture a decade ago for $1.3 billion in cash and
stock.
Yahoo is paying mostly cash for Tumblr, dipping into what remains of a
$7.6 billion windfall reaped last year from selling about half of its
stake in Chinese Internet company Alibaba Holdings Group. Taking over
Tumblr will devour about one-fifth of the $5.4 billion in cash that
Yahoo had in its accounts at the end of March.
While hailing Tumblr as a fount of creativity that attracts 300 million
visitors each month, Mayer told analysts Monday that she is "making a
sincere promise to not screw it up." David Karp, a high school dropout
who started Tumblr six years ago, will remain in control of the service
in an effort to retain the same "irreverence, wit and commitment to
empower creators," Yahoo said.
Karp, 26, may now have a managerial mentor in Mayer, 37. Tumblr, which
will remain based in New York, has about 175 employees while Yahoo has
11,300 workers.
Mayer, who worked closely with Google co-founders Larry Page and Sergey
Brin during her time at the company, had high praise for Karp during
Monday's conference call. "David Karp is one of the most inspiring,
insightful entrepreneurs that I have ever met," she said.
In his statement, Karp predicted Yahoo would help Tumblr grow even
faster as he strives "to make the Internet the ultimate creative canvas. "
The deal is expected to close during the second half of this year.
Tumblr will now play a pivotal role in Mayer's attempt to reshape Yahoo.
To take on the challenge, Mayer ended a highly successful 13-year career
at Google, which she helped surpass Yahoo as the Internet's most
influential company. Since coming to Yahoo, Mayer has concentrated on
improving employee morale, 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. She seized the
opportunity to buy Tumblr because she believes the service can
accelerate her efforts to turn around Yahoo.
"Tumblr is a game changer," Mayer assured analysts.
As popular as Tumblr has become, the service remains unprofitable. That
is likely to raise questions about whether Yahoo paid too much in
Mayer's zeal to gain control over a hot service. Facebook Inc. (FB)
faced similar doubts last year when it bought Instagram, a rapidly
growing photo sharing site, that also hadn't been trying to make money.
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.
Facebook still hasn't proven it will be able to make money off of Instagram.
Mayer's efforts at Yahoo have been well-received on Wall Street so far,
although most of the roughly 70 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 stock.
If this deal pays off the way Mayer envisions, Tumblr could help Yahoo
finally get its stock price to $33. That would be a major coup because
many investors soured on Yahoo after a previous regime led by co-founder
Jerry Yang squandered an opportunity five years ago to sell the entire
company to Microsoft for $33 per share. The stock spent more than four
years trading below $20 before the recent surge. The shares gained 14
cents to $26.66 in Monday's afternoon trading.
The deal could backfire though if Yahoo's effort to make more money
alienate a Tumblr user base that so far has been subjected to hardly any
advertising during the service's six-year history.
"Yahoo has to manage this acquisition in a way that keeps Tumblr's user
base while trying to add advertising, which historically tends to turn
off a lot of people," said Forrester Research analyst Zachary Reiss-Davis.
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 next year.
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 as people increasingly consume digital
content on mobile devices instead of laptop and desktop machines.
More than half of Tumblr's users connect to the service through the
mobile app, and engage in an average of seven sessions per day.
"I would characterize Tumblr as being ahead of Yahoo in terms of its
work on mobile," Mayer said.
Besides offering one of the top mobile apps, Tumblr also runs one of the
world's busiest websites, featuring 75 million daily posts about
everything from politics to pets. Advertising has been a missing
ingredient so far as Tumblr, like many online services in their early
stages, focused on building a loyal audience before turning its
attention to making money.
The deal also has some symbolic significance for Yahoo, an 18-year-old
company that had spent much of the past decade aimlessly drifting under
different management teams while Google Inc. overtook it in terms of
size and influence. At the same time, newcomers such as Facebook Inc.
and Twitter began to command the attention of people who found
themselves spending less and less time on Yahoo.
Part of Yahoo's problems stemmed from missed chances to improve its
service and technology.
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, which snapped up the world's leading online service
for $1.76 billion - a price that now looks like a bargain.
Even when Yahoo did pull off deals, the company has been criticized for
mismanaging a list of acquired services that includes photo-sharing
Flickr, online help-wanted service HotJobs and content-sharing service
Del.icio.us. Yahoo ended up selling HotJobs and Del.icio.us, but Mayer
has been looking at ways to spruce up Flickr and blend its photos into
more of Yahoo's other services. Mayer is expected to discuss more
changes for Flickr at an event in New York Monday evening.
Tumblr could help Yahoo recapture some of its cachet with teens and
adults in their early 20s, a demographic that has become tougher for
Yahoo to reach in recent years as it fell behind the technological curve
and struggled to develop compelling services.
While Facebook has turned into a mainstream social network where even
grandparents now connect family and friends, Tumblr has become one of
the places where the cool kids hang out.
"Tumblr is redefining creative expression online," Mayer said. "On many
levels, Tumblr and Yahoo couldn't be more different, but, at the same
time, they couldn't be more complementary."
Tumblr emerged as a trendy online hangout by providing a service that
makes it easy to share blog posts, photos, video and other content in an
enthralling mosaic. The service says it has amassed more than 50 billion
posts from 108 million blogs. Tumblr users rely on a dashboard to
pinpoint the kinds of blogs that they want to track and also have tools
to pass along the posts that interest them.
That wealth of content could be interwoven into Yahoo's other services
that provide coverage of general news, sports, finance and
entertainment. Tumblr also will fill Yahoo's gaping void in the realm of
social media. Yahoo so far has had to connect its services to Facebook
and Twitter to give its users a social networking outlet.
Having its own social networking service will also give Yahoo more
insights into the things that people like - a key to distributing ads to
consumers most likely to be interested in a specific products. That
data, in turn, should help Yahoo sell more ads and accelerate its
revenue growth. After three successive years of declines, Yahoo's
revenue rose slightly last year, but lagged far behind the growth at
Google and Facebook. Mayer has vowed to bring Yahoo's revenue growth
back to at least the level of the overall Internet ad market.
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 a development service called "Davidville" before deciding to create
an outlet for personal expression - an endeavor that hatched Tumblr.
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.
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Associate Professor Fax (713) 743-3927
Political Science Mail: antunes at uh dot edu
University of Houston
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