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Yahoo's $1B Deal For Tumblr Was a Very Big Mistake

By NexChange
Capital Markets

It seemed an odd pairing at the time: When Marissa Mayer announced in 2013 that Yahoo was purchasing blogging platform Tumblr for $1 billion, it felt a little bit like a shotgun wedding between two mismatched people in which one of them was maybe a little drunk, a little desperate and ready to leave her old life behind, while her friends sat on a cold, hard pew in the neon-lit chapel in Vegas knowing this marriage was doomed from the beginning.

And so here we are three years later with Yahoo essentially writing down about $700 million of the $1 billion it spent on Tumblr – and basically confirming the wedding was a huge mistake. Mayer announced on Monday that Yahoo had taken $482 million in impairment charges for Tumblr in the second quarter, which follows a $230 million writedown in last year’s fourth quarter.

Here’s the bleak assessment of where Tumblr stands now, via Quartz:

A bit of simple arithmetic puts Tumblr’s value after these writedowns at about $290 million. This is not only less than a third of its purchase price, but it’s also less than the value of Tumblr’s assets when it was acquired two years ago.

Tumblr is included as part of the Mayer-coined “Mavens” business for Yahoo – mobile, video, native and social – and had been projected to generate $100 million in revenue for the company last year. That did not happen according to Ken Goldman, Yahoo’s chief financial officer.

When the deal was first announced back in 2013, here’s how Quartz explained the fuzzy math Yahoo used to arrive at the now-confirmed insane valuation of $1 billion for Tumblr.

Valuing a fast-growing startup like Tumblr, which had little revenue when it was acquired, can be particularly difficult without a hefty helping of goodwill. The value of Tumblr’s tangible and intangible assets amounted to just $353 million, according to Yahoo’s accounting. Tumblr also had $114 million in liabilities.

So there’s that.

What Mayer attempted to do by purchasing Tumblr was equivalent to what Rupert Murdoch attempted to do by acquiring MySpace for $580 million back in 2005: She was trying to buy the buzz that her company could not create on its own. But like Murdoch – who later admitted that the acquisition of MySpace was obviously a huge blunder – Mayer failed.

The problem from the very beginning for Yahoo was that unlike Microsoft’s recent $26.2-billion purchase of LinkedIn, Yahoo was buying a product that just isn’t very scalable. Whereas LinkedIn offers Microsoft a massive user base of professionals to whom it can market and sale its software and other products, Tumblr offers Yahoo a massive, very young user base on a blogging platform that tends toward movie fan art, Ryan Gosling memes and porn.

For Yahoo – to paraphrase Gertrude Stein – there simply was never any there there.

Photo: Jolie O'Dell

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