Why Yahoo-Tumblr makes sense

By Felix Salmon
May 20, 2013

Amidst all the positivity coming out of Yahoo and Tumblr, any self-respecting pundit is going to want to pour cold water on the whole deal. Especially since billion-dollar mergers almost never work out very well. But here’s the weird thing: the more I look at this tie-up, the more it makes sense to me.

Yahoo has more than enough money to pay for Tumblr in cash, which is exactly what it’s doing. Here’s one easy way of seeing why this is a good deal for Yahoo: profitable tech companies (think Google, or Apple) tend to have too much cash and tend not to know what to do with it — with the result that it just sits there, uselessly. For Yahoo, having $4.4 billion in cash plus Tumblr is clearly going to be better in terms of the future than having $5.5 billion in cash, waiting interminably for some kind of Godot to come along and be bought. $1.1 billion is a lot of money, but it’s not so much money that it’s going to change the way that investors look at Yahoo’s balance sheet.

More fundamentally, Yahoo is acquiring 300 million young, mobile users at a stroke — along with invaluable information about what they like to consume online, and how they like to consume it. It’s a four-fer, in fact.

First, there’s the immediate traffic boost.

Second, there’s the ability to use Tumblr’s data to help optimize the rest of Yahoo’s pages. If I’m logged in to Tumblr, as I normally am, then when I go to Yahoo, I should see the kind of material that Tumblr knows I’m interested in, rather than some one-size-fits-all generic home page.

Third, Tumblr is Marissa Mayer’s opportunity for a Flickr do-over. The big portals have been extremely bad at building out genuinely interactive properties in the age of self-expression, and Tumblr knows how to attract a new generation of users who want to create rather than just consume.

And finally, Tumblr is the perfect platform for Yahoo’s brand advertisers to use if they want to start building up relationships with consumers, rather than just bombarding them with banner ads. (My friends at Percolate, an official Tumblr partner which was designed to solve this stock vs flow problem, are incredibly well placed to be huge winners from this deal.)

From Tumblr’s point of view, founder David Karp has extracted many promises from Mayer that she will leave the company alone, in New York City, to do its thing. “We’re not turning purple,” he says. More importantly, Karp can now outsource to Sunnyvale a lot of the gnarly monetization problems which the NY team was only slowly beginning to solve. The plan right now — which might change — is to give Tumbloggers the option to start running ads on their sites, presumably with some kind of revenue-sharing deal. But from day one, Yahoo’s sales team could simply start insisting that any brand wanting to buy ad space on the Tumblr dashboard will also have to buy a bunch of space on the Yahoo network. That’s a great way of leveraging the amount of money that Tumblr brings in.

And then of course there are the itchy VCs: Tumblr raised its first money back in 2007 at a $3 million valuation, resulting in a glorious 365X return for early investors including Fred Wilson and Jacob Lodwick.

Lodwick is on the record saying that acquisitions like this one are always a failure for the company being bought: “Big companies aren’t just big versions of small companies,” he writes. “They’re another class of entity entirely, more concerned with sustaining their own rhythms and control structures than experimenting with strange ideas from acquired ex-founders.” But part of the deal you make, when you accept VC funding, is that there will almost certainly be an exit within 5-10 years, and it will almost certainly not be an IPO where the founder retains control. This kind of exit, where the company is big enough to retain a modicum of independence, is the least bad outcome that Karp could realistically achieve.

It won’t be easy: as Peter Lauria points out, Yahoo’s decision to ban Kara Swisher and Peter Kafka of All Things D from the press announcement is exactly the kind of heavy-handed corporate meddling that Lodwick is talking about. And Tumblr’s users are predictably unhappy about the whole thing. But Yahoo certainly has the tools to help boost Tumblr’s flattening traffic numbers, while Karp should be able to retain enough control of Tumblr that his users don’t revolt entirely. After all, it’s far from clear where else they could go.

Most mergers fail, and this one could fail as well. But on the spectrum from “obviously doomed” (NewsCorp/MySpace) to “obviously sensible” (Google/YouTube), I’d put Yahoo/Tumblr well within the “sensible” half. Which is rare enough to be noteworthy.

Comments
6 comments so far

I am sorry but as an avid Tumblr user for personal and business blogs, having over 15 blogs for business alone. I do not agree. Yahoo has proven themselves to be the low man on the totem pole on the web and hiring a Google transplant has not helped. Yahoo buying Tumblr is not going to fix them. Mrs. Mayer’s recent changes to Yahoo are entirely too close to replicating Google features.

I may have to rethink my blogs now………and I am sure that I will not be the only. The users on Tumblr are very picky about this site and extremely annoyed by change. So it Yahoo changes anything about Tumblr it will become the fastest fall of an internet company in history.

Posted by MishQ | Report as abusive

And of course many people at the time thought Google was vastly overpaying for Youtube, eBay for PayPal etc. The lesson is that price alone is not the relevant determinant of future success, especially given your point that tech companies get little benefit from holding big slugs of cash.

Posted by ampressman | Report as abusive

This is all so Tuesday, but they probably deserve each other.

Posted by MyLord | Report as abusive

“For Yahoo, having $4.4 billion in cash plus Tumblr is clearly going to be better in terms of the future than having $5.5 billion in cash…”

Why is this clearly true?

It’s definitely not clearly true that for Yahoo’s shareholders having Tumblr is better than having Yahoo return the $1.1 billion to them as a dividend or buyback.

Do you mean clearly better for Yahoo’s management?

Posted by albertsun | Report as abusive

You don’t tumblr, or have any sense of tumblr culture. A lot of tramping around by Yahoo will make sure tumblr is the last cool thing, and will add another $1 billion bust to the list of what happens when you try to mix corporate cultures.

Posted by yummy8755 | Report as abusive

“profitable tech companies (think Google, or Apple) tend to have too much cash and tend not to know what to do with it — with the result that it just sits there, uselessly.”

A nasty consequence of not paying much in taxes, shall we say… Why do you allow us to forget that this money has been stolen from the American (and most likely a few other countries’) public(s)?

Posted by Foppe | Report as abusive
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