Will Yahoo Take A Tumble?

Yesterday Yahoo announced its plans to buy Tumblr for $1.1 billion in cash, which has really grabbed people’s attention. Marissa Mayer has made about 10 acquisitions since becoming CEO in July 2012, as part of her overall plan to make Yahoo part of our everyday routines.  This is her biggest investment yet.

Did Yahoo Overpay for Tumblr?

Some are already questioning if Yahoo overpaid for Tumblr, which until now has failed to generate any significant profits. On the upside, Tumblr brings with it 300 million unique visitors each month, but Yahoo still needs to make money on the deal. It’s certainly going to be tough to generate the level of return that’s required when you make an investment that’s all cash.

I would characterize the Tumblr deal this way. You’re talking about an acquisition with a mere $13 million in revenue, so Yahoo is paying 84 times revenue. Some have said Tumblr could make $100 million, but that would still mean Yahoo paid ten times revenue. The proof will be in the pudding — that’s to say, Yahoo’s ability to actually grow the revenues of the business. It’s far from clear how that will be done.

In the short term, one of the biggest benefits of this acquisition is a huge spread of people now talking about Yahoo, from businessmen to tech gurus to the teenage and twenty-something users of Tumblr.  Think about it, who was talking about Yahoo a year ago? Clearly this deal has caught people’s imagination.

Yahoo’s Promise

One of the things Yahoo should be careful about is the integration of Tumblr.  Yahoo’s image as an old internet company from the 1990s could have a negative impact on Tumblr users. Young users are a fickle group of folks that can and will move on to the next technology if they see Tumblr become irrelevant.

Yahoo’s press release on Tumblr “promises not to screw it up”.  But if Yahoo plans to “not screw it up,” what exactly are they planning to do with their acquisition? How will Yahoo balance the need to create value and growth in that business, and build some connectivity with Yahoo, while also continuing to attract new Tumblr users?

Fall-Out From the Tumblr Story

This deal is likely to put a lot of pressure on other companies. CEOs will be getting calls from the board asking “What’s our strategy? What are we going to do? How are we breaking into new technologies?” Another issue that I’ve written about before is the amount of excess cash currently sitting on the sidelines. $1.1 billion sounds like a lot of money, but it’s only one-fifth of the cash  on Yahoo’s balance sheet. There’s a lot of money and a lot of movement in the marketplace right now, so you’ll see growing pressure on CEOs to make acquisitions.

If you’re thinking about acquisition, I recommend you remain strategic, and don’t take a completely reactionary approach. Even if “everyone else” is buying companies, your acquisition will only be successful with a strategic plan. As for Yahoo’s acquisition of Tumblr, only time will tell if the risk will pay off.

*For more on my thoughts on Yahoo and Tumblr, check  out my interview on Fox Business News.

 

Photo Credit: Giorgio Montersino via Compfight cc

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