Yahoo buys Tumblr

SAN FRANCISCO – Yahoo is buying online blogging forum Tumblr for $1.1 billion as CEO Marissa Mayer tries to rejuvenate an Internet pioneer that had fallen behind the times.

The deal announced Monday is Mayer’s boldest move since she left Google 10 months ago to lead Yahoo’s latest comeback attempt. It marks Yahoo’s most expensive acquisition since the Sunnyvale, Calif., company bought online search engine Overture a decade ago for $1.3 billion in cash and stock.

Yahoo is paying mostly cash for Tumblr, dipping into what remains of a $7.6 billion windfall reaped last year from selling about half of its stake in Chinese Internet company Alibaba Holdings Group. Taking over Tumblr will devour about one-fifth of the $5.4 billion in cash that Yahoo had in its accounts at the end of March.

While hailing Tumblr as a fount of creativity that attracts 300 million visitors each month, Mayer told analysts Monday that she is “making a sincere promise to not screw it up.” David Karp, a high school dropout who started Tumblr six years ago, will remain in control of the service in an effort to retain the same “irreverence, wit and commitment to empower creators,” Yahoo said.

Karp, 26, may now have a managerial mentor in Mayer, 37. Tumblr, which will remain based in New York, has about 175 employees while Yahoo has 11,300 workers.

Mayer, who worked closely with Google co-founders Larry Page and Sergey Brin during her time at the company, had high praise for Karp during Monday’s conference call. “David Karp is one of the most inspiring, insightful entrepreneurs that I have ever met,” she said.

In his statement, Karp predicted Yahoo would help Tumblr grow even faster as he strives “to make the Internet the ultimate creative canvas.”

The deal is expected to close during the second half of this year.

Tumblr will now play a pivotal role in Mayer’s attempt to reshape Yahoo. To take on the challenge, Mayer ended a highly successful 13-year career at Google, which she helped surpass Yahoo as the Internet’s most influential company. Since coming to Yahoo, Mayer has concentrated on improving employee morale, redesigning services and bringing in more engineering talent through a series of small acquisitions that have collectively cost less than $50 million.

Yahoo will still focus on mostly small deals, Mayer said. She seized the opportunity to buy Tumblr because she believes the service can accelerate her efforts to turn around Yahoo.

“Tumblr is a game-changer,” Mayer assured analysts.

As popular as Tumblr has become, the service remains unprofitable. That is likely to raise questions about whether Yahoo paid too much in Mayer’s zeal to gain control over a hot service. Facebook Inc. faced similar doubts last year when it bought Instagram, a rapidly growing photo sharing site that also hadn’t been trying to make money. Facebook initially agreed to pay $1 billion in stock for Instagram, but the value had fallen to $715 million by the time that deal closed. Facebook still hasn’t proven it will be able to make money off Instagram.

Mayer’s efforts at Yahoo have been well-received on Wall Street so far, although most of the roughly 70 percent surge in Yahoo’s stock price under Mayer’s leadership has been driven by the rising value of Yahoo’s remaining 24 percent in Alibaba. When Alibaba goes public within the next few years, analysts have estimated Yahoo could collect another $10 billion to $20 billion by selling the rest of its Alibaba stock.

If this deal pays off the way Mayer envisions, Tumblr could help Yahoo finally get its stock price to $33. That would be a major coup because many investors soured on Yahoo after a previous regime led by co-founder Jerry Yang squandered an opportunity five years ago to sell the entire company to Microsoft for $33 per share. The stock spent more than four years trading below $20 before the recent surge.

The deal could backfire though if Yahoo’s efforts to make more money alienate a Tumblr user base that so far has been subjected to hardly any advertising during the service’s six-year history.

“Yahoo has to manage this acquisition in a way that keeps Tumblr’s user base while trying to add advertising, which historically tends to turn off a lot of people,” Forrester Research analyst Zachary Reiss-Davis said.

Mayer said Yahoo will work with Tumblr to create ads that “are tasteful and seamless.” The company expects Tumblr to start increasing Yahoo’s revenue next year.

Tumblr emerged as a trendy online hangout by providing a service that makes it easy to share blog posts, photos, video and other content in an enthralling mosaic. The service says it has amassed more than 50 billion posts from 108 million blogs. Tumblr users rely on a dashboard to pinpoint the kinds of blogs that they want to track and also have tools to pass along the posts that interest them.