Marissa Mayer is buying companies like it?s 1999.
The Yahoo! Inc. chief executive officer yesterday announced the company will acquire blogging network Tumblr Inc., part of a plan to restore the Web portal to its heyday as an Internet darling. With US$13-million in sales last year, Tumblr?s US$1.1-billion price tag represents the richest valuation for a dot-com company since 2000, according to data compiled by Bloomberg on deals for which revenue figures are available.
What is Tumblr anyway?
It?s an easy-as-it-comes blogging platform where Generation Y is sharing everything from snaps of their pets to videos, and stories from Dadaab, a Kenyan refugee camp.
FOUNDED: February 2007 by software consultant David Karp and web developer Marco Arment.
HEADQUARTERS: New York
LEADERSHIP: Founder David Karp, 26, is CEO. He owns a 25 per cent stake in the company.
EMPLOYEES: 175
FINANCIALS: Tumblr?s 2012 revenue was $13 million. The company?s net worth was estimated by Forbes at $800 million in 2011.
USERS: 54 million
DAILY POSTS: 70 million
MONTHLY PAGE VIEWS: 17.5 billion
LANGUAGES: Localized in 12 languages, including Polish, Turkish and Japanese.
BIG MOMENTS: Singer Frank Ocean announced that his first love was a man on his Tumblr blog. Singers Beyonce and Jay-Z posted the first photos of their new baby on Tumblr.
SMALL DELIGHTS: ?Sad Desk Lunch,? where users post photos of the lunches they?re eating at their desks. ?Same Ocean, Different Day,? where users from all over the world post photos of the Pacific Ocean. Sources: Tumblr; Forbes.
?Using any conventional metrics, the price is absurd,? said Scott Rostan, a former mergers and acquisitions analyst whose New York-based Training The Street teaches new hires at investment banks about deals. ?That?s because this isn?t about the valuation per se. It?s about future value, it?s about potential, and therefore it?s going to go on Yahoo?s team and Mayer?s shoulders and boil down to execution.?
Mayer will have to boost Tumblr?s revenue more than sevenfold to about US$100-million to bring the New York-based company?s valuation more in line with publicly traded Web peers such as LinkedIn Corp. and Zillow Inc., data compiled by Bloomberg show. While such growth wouldn?t be unprecedented among social-media companies, there?s no guarantee that Tumblr will maintain its popularity or that the deal is the best use of Yahoo?s cash, Pivotal Research Group said.
Sara Gorman, a spokeswoman for Sunnyvale, California-based Yahoo, didn?t respond to a phone call or e-mail seeking comment.
?Exceptional Company?
?You only do an acquisition of this size and scale if you find an exceptional company, and Tumblr is that,? Mayer said on a conference call yesterday. ?The growth in users has been impressive. It?s been among the strongest of all the major technology sites.?
Tumblr, founded by 26-year-old David Karp, offers a free service for publishing blogs that can be accessed on the Web and on mobile devices, as well as tools for sharing photos and videos across social networks. Mayer is betting that her purchase of the site will help transform Yahoo into a hip destination for users and advertisers in the era of social networking.
By adding Tumblr, Yahoo is expected to expand its audience by 50%, the company said in its statement announcing the deal.
High Price
Tumblr had US$13-million of revenue last year, according to PrivCo, which provides data on private companies. That means Yahoo is paying 85 times sales, the biggest multiple for an Internet company since 2000, the same year Yahoo?s stock peaked at US$118.75 amid the tech bubble, data compiled by Bloomberg show. Yahoo shares were valued at less than a quarter of that amount yesterday at US$26.58.
?Clearly it?s expensive,? Brian Wieser, a New York-based analyst at Pivotal Research, said about Tumblr in a phone interview. ?It?s not clear that the site will maintain its traction with users. It remains to be seen whether they can bring more advertisers. It?s just not clear yet whether this is the best way for Yahoo to spend? about US$1-billion.
Yahoo?s paying US$9.40 for each of the 117 million worldwide visitors that ComScore Inc. estimates visited the blog last month. Facebook Inc. paid about US$45 per active Instagram user when it acquired the photo-sharing phone application last year. Facebook CEO Mark Zuckerberg said May 1 that Instagram now has more than 100 million active users each month, up from 22 million when it agreed to buy the app.
Tumblr?s valuation would shrink to 11 times sales if its revenue climbed to about US$100-million ? an amount the company is targeting, according to a Forbes report earlier this year. U.S. social-media and Internet-based services companies with market values larger than US$1-billion have a median price-sales ratio of 6.4, data compiled by Bloomberg show.
Not Ridiculous
The two most expensive stocks in the industry are resume-sharing platform LinkedIn and real-estate listings site Zillow, which fetch multiples of 18 and 14, respectively, the data show.
In that sense, ?it?s not completely ridiculous,? John Blackledge, a New York-based analyst at Cowen Group Inc., said in a phone interview. ?It?s expensive, but for a hip, fast- growing social-blogging platform, it?s something that seems reasonable to us.?
The deal also doesn?t put much of a dent in Yahoo?s war chest, Blackledge said. Yahoo had US$5.4-billion of cash and equivalents as of March 31 and also owns about 20% of Alibaba Group Holding Ltd., China?s largest e-commerce company. Alibaba is expected to soon hold an initial public offering that would give Yahoo an even bigger cash stockpile, he said.
Deal Leeway
Some investors and analysts say that Wall Street is more focused on the rising value of Yahoo?s Asian assets, such as its slice of China?s Alibaba, than on actual business operations. That means Mayer faces less immediate pressure to prove that Yahoo?s biggest acquisition in years is a profitable one.
?Overall I?m relatively skeptical, but I don?t think it matters much to the stock,? Macquarie Research analyst Ben Schachter said of the deal.
When Mayer was considering how much to pay for Tumblr, her decision was probably less guided by concerns over valuation than it was by her competition, Schachter said.
?Say they destroy 100% of the value and drive Tumblr into the ground. It?s probably less than a dollar per share in value,? he said.
If Mayer?s bet delivers, however, some investors say it could provide even more upside to a stock already trading at its highest levels in years.
?The core business is the lottery ticket,? said Ryan Jacob, the chief executive of the Jacob Funds, who owns Yahoo shares.
?Investors? expectations for the core business are very low, so if they?re able to reinvigorate growth, that will move the needle,? said Jacob.
Tumblr had contacted bigger technology companies seeking to be bought, or form a partnership, prior to closing the deal with Yahoo, according to people with knowledge of the matter, who asked not to be identified because the overtures were private.
?With a lot of these Internet deals, the price really comes down to how much you need to pay to keep it away from somebody else,? he said. ?It?s very difficult to give any justification to US$1-billion on any of the metrics that are available today. It?s a lot of guess work and hope at this point.?
Keeping Tumblr cool
Yahoo must also hold onto Tumblr?s bloggers, many of whom were already stomping their feet at being assimilated into the decidedly ?less cool? Yahoo. Many vented their frustrations on the Tumblr blog entitled ?Meltdowns about Yahoo buying Tumblr.?
Defections have begun. As reports of the deal spread on Sunday, the founder of WordPress, a rival blogging platform, said it ?imported? 72,000 Tumblr blogs in a one hour period.
Yet for many investors, those questions are secondary to the impending IPO of Alibaba Group, which they say is one of the key factors buoying Yahoo?s stock. Analysts and investors estimate the value of Alibaba to be around US$70-billion. But Lawrence Haverty, a fund manager with GAMCO Investors, believes it could be worth US$100-billion or more when it goes public.
In the event Alibaba?s IPO does not live up to expectations, the fallout for Yahoo will be far more serious than anything that happens with Tumblr.
Here are Yahoo?s notable acquisitions since the heyday of the first dotcom boom:
Geocities:
In 1999, Yahoo bought Geocities ? a free service that hosted personal home pages for consumers and once ranked among the most-trafficked websites ? for US$4-billion-plus. Yahoo pulled the plug on the site in 2009, making the purchase one of the company?s most glaring acquisition failures.
Broadcast.com:
Shortly before the dotcom bubble burst, Yahoo picked up the Internet radio company for more than US$5-billion in 1999. While a win for tech entrepreneur and Broadcast.com founder Mark Cuban, industry watchers have said the exorbitant deal flopped as it did not deliver a return on investment.
Flickr:
The photo-sharing network joined the Internet company?s list of acquisitions in 2005.
Since taking the reins as CEO in July, Mayer has invested in giving its Flickr video and photo-sharing service a facelift to compete with rival products like Facebook?s Instagram.
Industry watchers say Yahoo did not give social media pioneer Flickr the attention it deserved early on, losing out to Facebook and Twitter that now dominate the social media space.
Terms of the deal were not disclosed, though some publications reported that Yahoo paid about US$35-million.
Alibaba Group:
Yahoo purchased a 40% stake in China?s largest e-commerce company for US$1-billion in 2005, a deal considered to be one of the search company?s most lucrative investments.
It now owns about 24% of the privately held company, which is widely expected to seek an initial public offering as early as this year. Some analysts say the company could fetch a valuation as high as Facebook?s US$100-billion.
Right Media:
The online ad exchange came onboard in 2007. Analysts had speculated that Yahoo was looking to sell off the platform it purchased for a reported US$850-million last year. But the company, now under Mayer?s watch, has said it is not for sale.
Summly, Jybe, OnTheAir, and others:
In March, Yahoo snagged mobile news aggregator Summly. Founded by 17-year-old Nick D?Aloisio in 2011 from his home in London, the Summly app sorts news by topics in quick bites for smartphones.
Media buzz around the deal turned the spotlight on D?Aloisio. Some reports, however, criticized the deal saying a vital part of Summly?s technology was not developed by the wunderkind but licensed from a non-profit research group called SRI International.
Terms of the deal were not disclosed, though technology blog AllThingsD reported that Yahoo paid roughly US$30-million. Yahoo?s new mobile app offers news summaries adopting Summly?s technology.
This year, Yahoo also acquired online video platform OnTheAir founded by former Google and Apple employees; and mobile recommendation startup Jybe founded by former Yahoo staff.
Dailymotion:
In early May, Yahoo?s plans to buy a 75 percent stake in the online video-sharing site, owned by France T?l?com SA, fell through after it was rebuffed by the French government that wanted the site to remain wholly French-owned.
Tumblr:
Yahoo bought Tumblr, one of the Web?s most popular hubs of so-called user-generated content, for $1.1 billion in cash, in an effort to establish a presence in the social media space.
Bloomberg.com, with files from Reuters and Associated Press
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