May 20 (Bloomberg) -- Yahoo! Inc. is buying blogging network Tumblr Inc. for about $1.1 billion as Chief Executive Officer Marissa Mayer seeks to lure users and advertisers with her priciest acquisition to date.
Tumblr, headquartered in New York, will continue to host its more than 108 million blogs, while CEO and founder David Karp, 26, will remain in charge of the website, “per the agreement and our promise not to screw it up,” Sunnyvale, California-based Yahoo said today in a statement.
Mayer, CEO of the biggest U.S. Web portal since July, is betting that Tumblr will help transform Yahoo into a hip destination for users and advertisers in the era of social networking. She’s using the deal to challenge Google Inc. and Facebook Inc. in the $17.7 billion display-ad market, and its price -- about a fifth of Yahoo’s $5.4 billion in cash -- reflects the role Tumblr will play in her turnaround effort.
“It’s an aggressive move,” Zachary Reiss-Davis, an analyst at Forrester Research Inc., said in an interview. “They are saying, ‘where is our next group of people who are going to spend many hours per week on Yahoo properties?’ It’s big bet that the answer is going to be Tumblr users.”
Mayer, in public statements, compared the transaction to Google Inc.’s $1.65 billion acquisition of YouTube, which catapulted the Web-search leader to the top of the online video business, and EBay Inc.’s purchase of PayPal, which is now the e-commerce company’s fastest growing business. Both targets remained independent even after the deals closed, she said.
“We want Tumblr to see that same kind of success,” Mayer said in an interview. “It’s really important to not have them be distracted by some of the elements that could come about if we were to, say, change a lot or try and integrate a lot.”
Yahoo plans to “allow them to run fast and stay true to their user base and their community,” she said.
Founded by Karp in 2007, Tumblr offers a free service for publishing blogs on the Web and mobile devices, and tools for sharing photos, video and other content across social networks. It has about 175 employees and had expected to reach its first annual profit this year after opening its platform to advertisers and making the service available on smartphones, executives said in March. The closely held company doesn’t disclose sales or profit figures.
“There was no expectation we were selling the company, certainly not this year,” Karp said in an interview. “This was an incredible opportunity for us to really change the way we were thinking about things.”
Yahoo’s shares fell less than 1 percent to $26.46 at 9:48 a.m. in New York. The stock had advanced 33 percent this year through May 17, compared with a 17 percent gain for the Standard & Poor’s 500 Index.
Karp and Mayer had been discussing working more closely together since December. They initially considered a partnership, Mayer said.
Adding Tumblr will expand Yahoo’s audience by 50 percent to more than 1 billion monthly visitors, and increase traffic by about 20 percent, according to the statement. The transaction is expected to close in the second half of 2013.
To achieve its targets, Yahoo will need to keep Tumblr’s bloggers from decamping to other platforms and avoid inundating users with ads.
Some Tumblr users are already showing signs of resistance to the Yahoo deal in posts on the blogging service, according to Doug Anmuth, an analyst at JPMorgan Chase & Co.
“Yahoo will need to balance its involvement with Tumblr to let the creative site flourish while also driving some benefits to core Yahoo,” Anmuth wrote in a research report today. “While Tumblr likely needs to take its feed advertising slowly so as not to negatively impact the user experience, the company should be able to leverage Yahoo’s sales force and advertising relationships.”
In a post on Tumblr today, Karp acknowledged the potential for users to resist any changes resulting from the Yahoo acquisition.
“Let me try to allay any concerns,” Karp wrote. “Marissa and her team share our dream to make the Internet the ultimate creative canvas.”
Tumblr grew to log more than 13 billion global page views in the past month. While Tumblr recently began letting advertisers pay for prominent placement, Karp has resisted covering Web pages with promotions to avoid alienating Tumblr’s younger audience.
The deal will make a multimillionaire out of Karp, who founded the company using money and experience he had acquired as a software consultant for the website UrbanBaby. Prior to that role, Karp was an intern at online-video creator Frederator Studios and worked as a salesperson at a Tekserve store in New York, according to his profile on LinkedIn Corp.’s site.
Karp grew up on Manhattan’s Upper West Side and dropped out of high school before moving by himself to Tokyo when he was 17. He founded Tumblr after returning to New York and still hasn’t earned his high-school diploma. The company’s headquarters, located in New York’s startup-laden Flatiron District, is adorned with artwork and conference rooms named after local landmarks, such as Waldorf and Metropolitan.
Yahoo, which gets almost all of its revenue from online promotions, will inherit Tumblr’s challenge of making money from a site while trying to preserve its cool factor, Forrester’s Reiss-Davis said.
“They have to balance keeping those users actively using Tumblr, while at the same time adding advertising and putting monetization around it,” he said. “Those are very difficult tasks to balance against each other.”
Tumblr’s content may also pose the risk of turning off some of Yahoo’s advertisers. The site’s terms of service permit nudity and other controversial material, and at least one pornographic site ranks among the 20 most-popular Tumblr blogs, according to Quantcast Corp.
Among Tumblr’s backers, Union Square Ventures in New York and Boston-based Spark Capital are the biggest winners. The firms led Tumblr’s first two financings, a $775,000 round in 2007 and a $4.5 million round the next year.
Sequoia Capital joined as an investor in late 2010 as part of a $30 million funding round. Tumblr then raised $85 million the following year, with firms including Greylock Partners, Insight Venture Partners, and Draper Fisher Jurvetson’s Growth Fund joining the existing investors.
Yahoo’s acquisition of Tumblr also brings validation to the New York technology community, which has seen startup activity increase in recent years with the success of companies including Tumblr, Gilt Groupe Inc. and Etsy Inc., according Ben Lerer, CEO of Thrillist Media Group and managing director at Lerer Ventures.
“This is a big, big win for New York,” Lerer said. “Everybody believes that there’s going to be a bunch of billion-dollar companies coming out of New York in the next few years, and this is the beginning.”
Yahoo’s purchase may help seed the next generation of New York startups, according to Howard Lerman, CEO of Yext, a business-listings website based in New York.
“It’s going to, first of all, give a billion dollars into the VCs and the people that work at Tumblr, and secondly it’s going to give the people at Tumblr the confidence to go out and try this themselves,” Lerman said.
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.
Mayer has purchased at least 11 companies in her 10 months as CEO, from mobile app makers Stamped Inc. and Jybe Inc. to Summly, the news-reading application created by teenager Nick D’Aloisio. Before Tumblr, most of her acquisitions have been small and focused on talent acquisitions -- small teams bought at low prices -- an approach she advocated during her first conference call with analysts last year.
Tumblr ranks among Yahoo’s largest acquisitions, which include the $5.7 billion purchase of Mark Cuban’s Broadcast.com and a $3.6 billion deal for Web-hosting site Geocities in 1999.
Mayer described the Tumblr deal as an exception to her merger strategy, which she said remains focused on smaller purchases to add talent.
“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 today.
The deal also reflects the widening influence of Jacqueline Reses, Yahoo’s chief development officer, who has been tasked by Mayer to lead talent management and mergers and acquisitions. As head of the U.S. media group at London-based Apax, Reses oversaw deals such as the $5.2 billion purchase of satellite provider Intelsat in 2005 and the $7.75 billion acquisition of textbook publisher Cengage Learning Inc. in 2007.
Mayer said in an interview last month that Reses’s “perspective on how to integrate companies well” was critical to her decision to work with the executive. Reses told employees at a staff meeting in late February that Yahoo was working on two “significant” acquisitions, according to a report in technology blog AllThingsD.
Asked whether Yahoo plans another deal sized similarly to Tumblr, Mayer said, “I’ve learned in my career to never say never, but at the same time, this certainly is an exceptional acquisition.”
Yahoo’s plan to buy a stake in France Telecom SA’s video site Dailymotion stalled last month after a disagreement about the deal, according to the French government.
Mayer had little to show for her efforts to turn around the company as of last month, when Yahoo reported a drop in its main display-advertising business and issued a sales forecast for this quarter that may fall short of analysts’ estimates. Mayer’s push to revamp products such as Yahoo’s home page and e-mail have made little headway to reverse a decline in display, an area where Google and Facebook are gaining ground.
To contact the editor responsible for this story: Tom Giles at email@example.com