The deal announced on
Monday represents Mayer’s boldest move yet since she left Google 10
months ago to lead Yahoo’s latest comeback attempt. It marks Yahoo’s
most expensive acquisition since the Sunnyvale, California, company
bought online search engine Overture a decade ago for $1.3 billion in
cash and stock.
Yahoo is paying all cash for Tumblr,
dipping into some of its remaining stash from 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.
Yahoo also says that
“per the agreement and our promise not to screw it up, Tumblr will be
independently operated as a separate business” with David Karp staying
on as CEO.
Tumblr, a service started six years by
Mr. Karp, a high school dropout, now figures to play a pivotal role in
Ms. Mayer’s attempt to reshape Yahoo. To take on the challenge, Ms.
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, Ms. 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.
If this deal pays off the way Ms.
Mayer envisions, Tumbler 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 that lifted the price to $26.52 through last
week.
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.
“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.
Ms. 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.
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.
Tumblr will remain based
in New York and led by Mr. Karp, 26, who may now have a mentor in Ms.
Mayer, 37. The startup has about 175 employees.
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 Delawareicio.us.
Yahoo ended up selling HotJobs and Delawareicio.us, but Ms. Mayer has
been looking at ways to spruce up Flickr and blend its photos into more
of Yahoo’s other services. Ms. Mayer is expected to discuss more changes
for Flickr at an event in New York on 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
emerged has 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.
Yahoo’s
acquisition will deliver a jackpot to Mr. 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, Mr. Karp set up
his own a development service called “Davidville” before deciding to
create an outlet for personal expression an endeavour that hatched
Tumblr.
Mr. 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.