Yahoo Inc said it is buying blogging service Tumblr for $1.1 billion cash, giving the struggling Internet pioneer a much-needed platform in social media to reach a younger generation of users.
The deal, announced Monday, is a bold bet by Yahoo Chief Executive Marissa Mayer to revitalize the company by co-opting a Web property with strong visitor traffic, but little revenue.
Yahoo made clear it was sensitive to concerns that it might damage Tumblr by making it less irreverent or more corporate.
“Per the agreement and our promise not to screw it up, Tumblr will be independently operated as a separate business,” Yahoo said in a statement.
The acquisition, which will use up about a fifth of Yahoo's $5.4 billion in cash and marketable securities, is the largest by far since Mayer took the reins in July with the goal of reversing a long decline in Yahoo's business and Web traffic.
Analysts said Yahoo appeared to be overpaying for a business that might not contribute to revenue for years, but said that Yahoo had to do something to plug a hole in its social media efforts.
RBC Capital Markets analyst Mark Mahaney called it a “long-shot/long-term investment” but one that fits into Mayer's turnaround strategy.
“[Yahoo's] fundamentals have been subpar for numerous years, in part because of the company's missing presence in Social and Mobile. Tumblr may help [Yahoo] develop that presence,” Mahaney said in a note.
Tumblr is one of the Web's most popular hubs of so-called user-generated content, drawing young people who use the platform to post pictures and text. Tumblr has more than 100 million blogs in its network, ranging from “White Men Wearing Google Glass” to housing-focused “The Worst Room.”
Though Yahoo remains one of the Web's most popular destinations, it has seen its revenue shrink in recent years as consumers and advertisers favor rivals such as Google and Facebook. The deal is expected to increase Yahoo's audience by 50 percent.
While Tumblr is certainly popular - it has tens of millions of monthly unique visitors - analysts questioned what kind of contribution it will make to Yahoo revenue, since advertising on the site is in its nascent stages.
Media reports have pegged Tumblr's 2012 revenue at $13 million. The privately held company, based in Manhattan, does not disclose its financial results.
Yahoo expects that Tumblr will help boost revenue by 2014, Ken Goldman, Yahoo's chief financial officer, said on a call with analysts. He did not provide specific numbers.
“Even if revenue was $100 million, it means Yahoo paid 10 times revenue,” said BGC Financial analyst Colin Gillis. “Ten times is what you pay to date the belle of the ball. It's on the outer bands of M&A.”
Yahoo could quickly boost Tumblr's revenue by combining the website with its own sales force, said Pivotal Research Group analyst Brian Wieser. Loading Tumblr up with banner ads risks alienating its users, however, and probably wouldn't provide a significant lift to Yahoo's overall revenue, he said.
“It's not clear that this deal will be favorable from a return-on-capital perspective,” Wieser said. “One billion [dollars] for one company is a big bet.”
Gillis and Wieser were contacted on Sunday after the deal was reported by the online publication All Things D.
Mayer, on the conference call, described the Tumblr deal as an exception and said Yahoo was not necessarily planning lots of similarly sized deals.
Yahoo is one of several companies that have coughed up considerable money for buzz-worthy start-ups that hold promise. Facebook bought the popular social media photo site Instagram for $1 billion last year. In 2006, Google paid $1.6 billion for YouTube.
Shares of Yahoo rose as much as 2 percent in early trading Monday, but later fell back. They were up 18 cents to $26.70 in late-morning dealings. Through Friday's close, the shares had risen 70 percent since Mayer became CEO.
One question Yahoo may have to address is Tumblr's reputation as a home for pornographic blogs. At one point in 2009, about 80 percent of Tumblr's top sites had something to do with adult content. Today that number is closer to 5 percent, according to Quantcast data, but the image lingers.
Mayer said on the call that Yahoo's targeting tools would allow advertisers to zero in on specific demographics and content.
One area where Yahoo plans to ramp up advertising: Tumblr's dashboard, the main landing point, akin to a newsfeed.
Dealing with that and other issues may fall to David Karp, 26, who founded Tumblr in 2007 and will remain CEO.
Karp, a self-taught programmer who left high school in favor of home schooling, did not take part in Mayer's conference call. Media reports have suggested his take in the billion-dollar sale would top $200 million.
In a 2012 interview with The Guardian, Karp seemed to be less interested in money than in Tumblr's prominence.
“There are a lot of rich people in the world. There are very few people who have the privilege of getting to invent things that billions of people use,” he said.