Yahoo's chief executive is making a US$1.1 billion ($1.3 billion) bet on the online blogging forum Tumblr as Marissa Mayer tries to make a former internet icon cool again.
The deal announced yesterday 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 US$1.3 billion in cash and stock.
Mayer told analysts she is "making a sincere promise to not screw it up".
Yahoo is paying mostly cash for Tumblr, dipping into what remains of a US$7.6 billion windfall reaped last year from selling about half of its stake in Chinese internet company Alibaba. Taking over Tumblr will devour about one-fifth of the US$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 a month. David Karp, a 26-year-old high school dropout who started Tumblr six years ago, will remain in control of the service to try to retain the same "irreverence, wit and commitment to empower creators", Yahoo said.
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.
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 play a pivotal role in Mayer's attempt to reshape Yahoo after her successful 13-year career at Google, during 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. Facebook faced similar doubts last year when it bought Instagram, a photo sharing site. Facebook initially agreed to pay US$1 billion in stock for Instagram, but the value had fallen to US$715 million by the time that deal closed. Facebook still hasn't proven it will be able to make money from Instagram.
Mayer's efforts at Yahoo have been well-received on Wall Street, although most of the 69 per cent surge in Yahoo's stock price under Mayer's leadership has been driven by the rising value of Yahoo's remaining 24 per cent in Alibaba. When Alibaba goes public within the next few years, analysts have estimated Yahoo could collect another US$10 billion to US$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 US$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 company to Microsoft for US$33 a share. The stock spent more than four years trading below US$20 before the recent surge. The shares closed yesterday at US$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 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 to the service through the mobile app.
Karp's cut from the Yahoo deal is about US$275 million.