When Tumblr CEO David Karp dropped out of high school at the tender age of 15 to pursue his lifetime fascination of creating and designing the most lucrative backend blogger platform (Tumblr), he probably didn’t think that just nine short years later he would be the newest tech millionaire. After successfully wrapping up a behemoth tech deal with buyer Yahoo last week, that’s exactly what he has become. And, natheless, he still holds the reigns of his tech company as acting CEO, with Yahoo implicitly reassuring fans of Tumblr that nothing will be changed and that Karp will still be running his entity as a separate one from that of Yahoo.In so many words: the site won’t go “purple,” and Yahoo plans not to “screw it up” for users.
The pursuit of Tumblr by Yahoo is part of Yahoo CEO Marisa Mayer’s attempts to cater the service to the younger audience, who relies upon social media more so than the Baby Boomer markets and other age related niches. Together they create an unrivaled web powerhouse that provides services to more than 1 billion users. The goal is to attract more advertisers and help retain visitors on both sites for longer durations of time, exponentially helping Yahoo to manage its budget and remain competitive in the wake of juggernaut competitors like Amazon, Google and Bing.
However, analysts are not so optimistic.
Tumblr has actually never posted an official profit. Yahoo is, essentially, shelling out big time bucks for a business that may or may not increase profit. The lure of hundreds of millions of users is obviously something that the entity finds to be attractive. Tumblr also makes sizably fewer revenues in regard to sales, too. The deal will stand to net the Tumblr founder, Karp, untold millions of dollars.
While Yahoo remains an uncontested internet force, it’s seen its audience and revenue shrink drastically over the past few years. With the acquisition of Tumblr, the entity stands to gain a healthy 50 percent audience increase. The acquisition will tap Yahoo by about one fifth of its cash on hand, representing a risky power play by Mayer, who has been trying to reverse the downward spiral of Yahoo’s profitability decline since she took over as CEO.
Yahoo anticipates that the purchase will help steamroll revenue into the black by 2014, by as much as $100 million.
“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.”
Will Yahoo learn from its past? After the Geo Cities debacle, which cost the company $3 billion on a dying service that they closed doors on in 2009, it certainly has not been all bread and butter.
“It’s not lost on me that there were some large acquisitions done in Yahoo’s history that did not go well,” Mayer said in the interview with Reuters. She said Yahoo now has a completely different management team, committed to making the Tumblr deal work.
As for Karper, it’s all about appeasing the social media masses.
“There are a lot of rich people in the world. There are very few people who have the privilege of getting to invent things that billions of people use,” he said.
Shares of Yahoo were up 27 cents, or 1 percent, at $26.78 in afternoon trading. Through Friday’s close, the shares had risen 70 percent since Mayer became CEO.