Yahoo pays $1BN for Tumblr to make it relevant for a new young generation

Yahoo has agreed a deal to buy New York-based blogging service Tumblr for $1.1bn (£723m; 857m euros) in cash and chief executive Marissa Mayer said that as part of its promise “not to screw it up”, Tumblr would operate independently.

The deal is the largest made by Mayer since she took the helm at Yahoo last July, and she described the acquisition as a “unique opportunity” adding: “On many levels, Tumblr and Yahoo couldn’t be more different, but at the same time, they couldn’t be more complementary.”

David Karp, 26, who owns 25 per cent of the privately-owned company he co-founded with Marco Arment in 2007, said he was “elated” to have the support of Yahoo and will continue as chief executive officer of Tumblr.

Buying Tumblr will open up Yahoo to a younger generation as long as they don’t impose any rules and too much advertising on their new $1.1 billion acquisition, says a digital communications expert.

The $1.1bn price tag for Tumblr represents a significant premium on its $800m valuation when it last raised money from private investors.

Tumblr’s 2012 revenue was just $13m, according to a report by Forbes magazine, leading analysts to suggest Yahoo had overpaid for the deal.

“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.”

Professor John Baptista believes it is a good move by Yahoo and will help them catch up with Google and Facebook in the social media market.

Yahoo makes its money from advertising through its email service, but Professor Baptista says this is a dying technology and Tumblr’s blogging know-how will help it to deliver a multi-platform service that users are increasingly demanding.

The Warwick Business School Professor said: “Yahoo is pretty ‘old school’ now, as email is slow and old, so this is a good move for their brand image. Acquiring Tumblr will make it more edgy and allow them to engage a younger generation. They seem to be targeting the Google+ type of platform where they can combine their expertise in email technologies with a more dynamic platform for blogging, pictures and video, which will make them more attractive.

“This puts Yahoo on the map for the young and technology-savvy generation. From my research I have found that the use of email is reducing more and more and so Yahoo have to find a way to operate to challenge the likes of Google, by offering the same kind of functionality and speed of communication.

“But Yahoo has to be careful to keep Tumblr’s integrity as if it starts imposing rules and interfering with the functionality of the platform with advertising they will kill it.”

Professor Baptista doesn’t believe Yahoo has paid over the odds for Tumblr, saying the $1.1 billion price tag shows the potential of the site.

“The markets might be surprised by the price, given Tumblr’s revenues, but I think it shows Yahoo has a clear plan to monetize the operation,” said Professor Baptista. “Yahoo paid what Tumblr is worth for them and this could reflect a premium over the market price because its a quick way to expand and grow their capabilities and service.

“I think they will keep Tumblr separate, but they will use the expertise to enhance their operation and provide a dynamic platform where their traditional advertising strength can be utilised, though they can’t over play this too much. It is a good move and gives Yahoo an edge.”