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Yahoo seeks turnaround with $1.1-billion deal to buy Tumblr

Yahoo's $1.1-billion acquisition of trendy social blogging service Tumblr is a bold — and risky — strategy to turn around the struggling Internet giant.

May 20, 2013|By Jessica Guynn, Los Angeles Times
  • The Yahoo board of directors approved the $1.1-billion all-cash acquisition of Tumblr over the weekend, and an announcement could come as early as Monday, according to a person familiar with the deal who spoke on condition of anonymity to preserve a relationship with both companies. Above, Yahoo headquarters in Sunnyvale, Calif.
The Yahoo board of directors approved the $1.1-billion all-cash acquisition… (Justin Sullivan, Getty…)

SAN FRANCISCO — Yahoo Inc. Chief Executive Marissa Mayer is attempting a bold — and risky — strategy to turn around the struggling Internet giant with the $1.1-billion acquisition of Tumblr, a trendy social blogging service popular with teens and young adults.

Though Yahoo still has a massive online audience, it's losing its grip on young people and how they consume the Internet on mobile devices. Tumblr, a 6-year-old company with 100 million users who share links, photos and blog posts, represents the new guard of the Internet.

With Tumblr, the former Google Inc. executive is making her biggest move yet to make Yahoo relevant to a new generation. In doing so, she's hoping to revive Yahoo's business, which has been in a prolonged slump.

But analysts say paying such a big price for Tumblr, which in late 2011 was valued by its investors at $800 million, had better be worth it. Yahoo has a history of buying promising young companies only to let them waste away. Acquisitions under previous Yahoo chiefs such as Geocities, an early social networking site, and Flickr, the popular photo sharing website, were long neglected within the company.

"Certainly Yahoo has a track record of taking cool and making it uncool," said Altimeter Group analyst Brian Solis. "Marissa Mayer is trying to bring Yahoo's brand appeal to a different type of audience. Yahoo sees this as a path to future relevance."

The Yahoo board of directors approved the all-cash deal over the weekend, and an announcement could come as early as Monday, according to a person familiar with the deal who spoke on condition of anonymity to preserve a relationship with both companies.

A Yahoo spokeswoman declined to comment. Tumblr could not be reached for comment.

Since she took command of Yahoo in July, Mayer has focused on redesigning Yahoo services to cater to mobile device users, mostly through the acquisitions of tiny startups. In just the first three months of this year, Yahoo bought three startups for a combined $10 million.

With plenty of cash, Mayer has been eyeing bigger deals — using a playbook from her days at Google. Mayer has kicked the tires of several high-profile companies, including online scrapbooking service Pinterest. She attempted a $200-million deal for a controlling interest in the popular video website Dailymotion, owned by France Telecom but abandoned the bid after the French government objected.

So far investors have backed Mayer. Yahoo's stock price has surged 69% since she took over.

With the Tumblr deal, Yahoo could help it generate more money by selling ads while giving a boost to its own revenue and to its profile.

Tumblr has developed a loyal following as a go-to social network for young people but has struggled to generate revenue.

David Karp, Tumblr's 26-year-old founder, has focused on the company as a "platform for creativity," not to make money.

He eschewed conventional online ads, fearful they would spoil the creativity and community on Tumblr. Karp told the Los Angeles Times in 2010 that he was "pretty opposed to advertising. It really turns our stomachs."

Nonetheless, Tumblr began placing ads on its service last year as its funds began to dry up. Reports say that Tumblr generated $13 million in revenue last year. Some advertisers have steered clear of Tumblr because of a large amount of pornography and otherwise inappropriate content on the service.

Although Karp may not have succeeded in building a big business, he has built a social network that young people identify as their own — making it a valuable prize for other Internet companies such as Google and Microsoft Corp. looking for a youthful injection. Karp has rejected all previous offers for his company, according to media reports.

In March, Tumblr had about 117 million unique users worldwide, up from about 58 million a year earlier, according to research firm ComScore Inc. On smartphones, Tumblr had almost 12 million unique visitors, up from about 4 million a year earlier, ComScore said.

By and large, Tumblr users reacted with dismay at the prospect of Yahoo buying Tumblr. Many users were not born yet when the online portal was formed in 1994, and they fear it will ruin the online service that speaks to their generation. Yahoo is expected to allow Tumblr to operate as an independent business with Karp remaining at the helm.

Said one post: "Go away Yahoo you can't sit with us."

The problem isn't just Yahoo's advanced age. Tumblr's users dosn't even know what Yahoo is.

Yahoo, initially created as a homepage for the Internet, has struggled now that the Internet has no need for a homepage. The only time many people use Yahoo is to check email or the weather on their smartphone.

"It's very much the generation gap," said Alexia Tsotsis, co-editor of technology blog TechCrunch and an avid user of Tumblr since 2010.

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