May 20, 2013

Yahoo paying $1.1 billion for Tumblr

The deal is CEO Marissa Mayer’s boldest move since she left Google and one of Yahoo’s priciest.

The Associated Press

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Yahoo, based in Sunnyvale, Calif., expects to close the deal for Tumblr during the second half of this year. Yahoo hopes to make money without alienating Tumblr’s user base.

David Paul Morris/Bloomberg News

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Yahoo CEO Marissa Mayer has high praise for Tumblr founder David Karp. She hopes the acquisition will hasten Yahoo’s turnaround.

Bloomberg News photo

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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 years.

"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 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 -- which now looks like a bargain.

Even when Yahoo did pull off deals, the company has been criticized for mismanaging acquisitions that include photo-sharing Flickr, 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.

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