Yahoo takes big leap with $1.1B deal for Tumblr (Update 3)

May 20, 2013 by Michael Liedtke
In this April 18, 2011 file photo, the Yahoo logo is displayed outside of the offices in Santa Clara, Calif. (AP Photo/Paul Sakuma, File)

Yahoo's CEO is making a $1.1 billion bet on the online blogging forum Tumblr as Marissa Mayer tries to make a former Internet icon cool again.

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 it bought online search engine Overture a decade ago for $1.3 billion in cash and stock.

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

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.

Mayer praised Tumblr as a fount of creativity that attracts 300 million visitors each month. David Karp, a 26-year-old 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.

"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.

Tumblr 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.

Tumblr, which will remain based in New York, has about 175 employees, while Yahoo has 11,300.

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 after her 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 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 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. faced similar doubts last year when it 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. 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 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 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 added 6 cents Monday to close at $26.58.

The deal could backfire, though, if Yahoo's effort to make more money alienates a Tumblr user base that so far has been subjected to hardly any advertising during the service's six-year history.

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.

More than half of Tumblr's users connect to the service through the mobile app.

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.

In this Oct. 1, 2012 file photo, Tumblr founder David Karp participates in the "Bloomberg Leadership Summit" seminar in New York. In a deal announced Monday, May 20, 2013, Yahoo is buying New York-based Tumblr, the online blogging forum, for $1.1 billion. About $275 million will go to Karp, 26, who dropped out of high school to concentrate on computer programming and started Tumblr six years ago. (AP Photo/Charles Sykes/Invision for Advertising Week)

The deal also has some symbolic significance for Yahoo, an 18-year-old 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 Inc. and Twitter began to command attention.

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 video service for $1.76 billion—a price that now looks like a bargain.

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.

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. 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—a key to distributing ads to consumers. 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.

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.

The Tumblr deal overshadowed Yahoo's previously scheduled announcement on changes to its Flickr photo-sharing service, including a boost in the amount of free storage to 1 terabyte, far more than what rivals offer. Like Tumblr, Yahoo got the photo service by buying a promising startup.

Key events involving Yahoo and its performance

Yahoo has reached a deal to buy online blogging forum Tumblr for $1.1 billion, the latest acquisition under CEO Marissa Mayer. Yahoo is paying mostly cash for Tumblr and expects to complete the deal by the end of the year. Here are key events involving Yahoo Inc. and its performance in recent years:

Nov. 17, 2008: Yahoo Inc. says co-founder Jerry Yang will step down as CEO as soon as a replacement is found. It ends a rocky reign marked by Yang's refusal to sell the Internet company to Microsoft Corp. for $47.5 billion, or $33 per share, in May 2008. Yahoo's board had been facing pressure to push him out as its stock plunged to its lowest levels since early 2003 and well below Microsoft's last offer price.

Jan. 13, 2009: Yahoo names technology veteran Carol Bartz as its new chief executive, bringing in a no-nonsense leader known for developing a clear focus.

June 11: Yahoo hires a cost-cutting specialist, Tim Morse, as its new chief financial officer.

July 29: Microsoft and Yahoo announce a 10-year search deal. After the deal is completed months later, Yahoo turns over responsibility for search technology to Microsoft, while Yahoo concentrates on sales of billboard-style advertising on the Web.

Oct. 7, 2010: Yahoo rolls out new tools to get people to the information they seek more quickly, especially when searching about entertainment, sports and major events. The hope is to distinguish itself from its Internet search partner, Microsoft, because Yahoo gets a cut of ad revenue when searches are done on its own site.

Sept. 6, 2011: Yahoo fires Bartz after less than three years on the job. Morse is named interim CEO.

Jan. 4, 2012: Yahoo names Scott Thompson, president of eBay Inc.'s PayPal division, as Yahoo's new CEO, its fourth in less than five years.

Jan. 17: Co-founder Yang leaves the company as he steps down from the board of directors. He had been on Yahoo's board since its 1995 inception.

Feb. 7: Chairman Roy Bostock and three other longtime board members say they won't seek re-election to give Thompson an enhanced team of independent directors. Many Yahoo shareholders had been clamoring for Bostock to step down since the company balked at Microsoft's 2008 takeover offer.

April 4: Yahoo announces plans to lay off 2,000 employees, or about 14 percent of its workforce. The cuts are part of an overhaul aimed at focusing on what Thompson believes are Yahoo's strengths while also trying to address its weaknesses in the increasingly important mobile computing market.

April 6: Thompson unveils a plan to reorganize the company into three main divisions focused on users, advertisers and technology. Yahoo believes the new structure will improve users' experience with Yahoo, work closely with advertisers in different regions of the globe and strengthen the company's technology group.

April 17: Yahoo reports first-quarter earnings, the first results under Thompson. Revenue grew less than 1 percent, but it's a breakthrough because the company's revenue has been steadily falling for years.

May 3: Hedge fund manager Daniel Loeb, who controls a 5.8 percent stake in the company through his Third Point fund, questions Thompson's qualifications and integrity after exposing a misrepresentation about the executive's education. Yahoo blames an "inadvertent error."

May 13: Thompson is out at Yahoo. Ross Levinsohn, who oversees Yahoo's media and advertising services worldwide, is named interim CEO.

June 18: Yahoo says Michael Barrett, a former colleague of its interim CEO, will run Yahoo's advertising sales team as chief revenue officer.

July 16: Yahoo names longtime Google executive Marissa Mayer as its fifth CEO in as many years.

July 17: On Mayer's first day on the job, Yahoo reports lackluster quarterly results, underscoring the challenges she will face.

July 30: Yahoo announces Levinsohn is leaving the company.

Sept. 18: Yahoo completes a long-awaited, $7.6 billion deal for Chinese e-commerce company Alibaba Group to buy back half of Yahoo's 40 percent stake. Most of the proceeds will go to its shareholders, but Yahoo still has an extra $1.3 billion to finance acquisitions or hire new talent.

Sept. 25: Software industry veteran Ken Goldman is named chief financial officer, replacing Morse, as Mayer moves swiftly to build her senior management team.

Oct. 22: In the first quarter under Mayer, Yahoo reports third-quarter results that topped analyst estimates. Yahoo's net revenue barely grew at a time when advertisers are spending more money marketing their products and services online. Nevertheless, the numbers were slightly better than analysts projected.

Jan. 28, 2013: Although Yahoo still isn't keeping pace with the overall growth of the Internet ad market, the company says it fared well enough during the fourth quarter to produce its first full-year gain in revenue since 2008. It was a scant increase: just $2.4 million higher than 2011's total of nearly $5 billion.

Feb. 12, 2013: Mayer tells an audience of investors that Yahoo will be better served with just 12 to 15 mobile applications, down from a "scattered" portfolio of as many as 75 different programs in recent years.

Feb. 20: Yahoo unveils a long-awaited makeover of its home page to get people to visit more frequently and linger for longer periods of time. It's the first time Yahoo has redesigned the page in four years. Yahoo says it has developed more sophisticated formulas to determine which topics are most likely to appeal to different people so the news feed can be fine-tuned to cater to different tastes.

March 6: Yahoo discloses that Mayer received a $1.1 million bonus for her first five-and-half months running the Internet company. She was eligible for an annual bonus of up to $2 million. Yahoo adjusted it to reflect that Mayer spent less than half the year as CEO.

March 20: Yahoo says it has bought Silicon Valley startup Jybe so it can bring back five of its former engineers to help the Internet company build better mobile applications.

March 25: Yahoo says it is buying London startup Summly, the maker of a mobile application created by teenage entrepreneur seeking an easier way to read news stories and other content on the smaller screens of smartphones.

April 16: A drop in Yahoo's ad revenue during the first three months of the year overshadows a 36 percent increase in earnings that topped analyst forecasts. Mayer says the company is engaged in a "series of sprints" that will culminate in more robust growth.

April 18: Yahoo releases new mobile apps.

April 25: Yahoo says Chairman Alfred Amoroso will become the eighth director to leave since early 2012. He will leave the board on June 25. Amoroso is giving up the chairmanship immediately. Maynard Webb Jr. will handle the duties on an interim basis. Amoroso, who became chairman 11 months earlier after Thompson left, says he had intended to serve as chairman for only a year.

Monday: Yahoo announces a deal to buy online blogging forum Tumblr for $1.1 billion. Mayer is betting that Tumblr will provide Yahoo with a captivating hook to reel in more traffic and advertisers on smartphones and tablet computers. More than half of Tumblr's users connect through the mobile app and engage in an average of seven sessions per day.

At a glance: comparing Yahoo and Tumblr

Yahoo is paying $1.1 billion to buy the popular blogging site Tumblr. It's part of Yahoo's comeback efforts, after years in a financial funk. Tumblr will give Yahoo more opportunities to sell advertising. Here's how the two companies compare:

— TUMBLR

FOUNDED: February 2007 by software consultant David Karp and Web developer Marco Arment.

HEADQUARTERS: New York

LEADERSHIP: Founder David Karp, 26, is CEO. He owns a 25 percent stake in the company.

EMPLOYEES: 175

FINANCIALS: Tumblr's 2012 revenue was $13 million. The company's net worth was estimated by Forbes at $800 million in 2011.

SERVICES: Blogging services where people share everything from snaps of their pets to videos, and stories from Dadaab, a Kenyan refugee camp.

— YAHOO

FOUNDED: 1994 by Stanford Ph.D. candidates David Filo and Jerry Yang

HEADQUARTERS: Sunnyvale, California.

LEADERSHIP: Marissa Mayer was lured from Google in July to become Yahoo's fifth CEO in as many years.

EMPLOYEES: 11,300

FINANCIALS: Yahoo's 2012 revenue was $5 billion, or $4.5 billion after subtracting advertising commission. It has a market valuation of $28.8 billion.

SERVICES: A wide range of services, including search, email, photo sharing and news.

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