Yahoo Takes Big Leap with $1.1B Deal for Tumblr

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  • SAN FRANCISCO (AP) — Yahoo is buying online blogging forum Tumblr for $1.1 billion as CEO Marissa Mayer tries to rejuvenate an Internet icon that had fallen behind the times.

    The deal announced 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, Calif., 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.

    While hailing Tumblr as fount of creativity that attracts 300 million visitors per month, Yahoo pledged “not to screw it up.” David Karp, a 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.

    Karp, 26, who may now have a managerial mentor in Mayer, 37. Tumblr, which will remain based in New York, has about 175 employees while Yahoo has 11,300 workers.

    Mayer, who worked closely with Google co-founders Larry Page and Sergey Brin, had high praise for Karp in a statement. She described him “as one of the most perceptive, capable entrepreneurs I’ve ever worked with.”

    In his statement, Karp predicted Yahoo would help Tumblr grow even faster as he strives “to make the Internet the ultimate creative canvas. “

    Tumblr now figures to play a pivotal role in Mayer’s attempt to reshape Yahoo. To take on the challenge, 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, 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.

    Her efforts 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, 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 alienate 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.

    Yahoo said it will work with Tumblr to create ads that “are seamless and enhance the user experience.”

    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.

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