Microsoft To Buy Tumblr?

Marissa Mayer

Yahoo CEO Marissa Mayer has been on a shopping spree lately.  Since she took over Yahoo she has made a number of acqui-hires including Stamped (a mobile-review app maker), OnTheAir (in broadcasting video chats or interviews to online audiences) (clipping service for the web), Alike, Jybe (a social recommendation site), Summly (a news condenser app maker), Astrid (a task-management app), GoPollGo, MileWise, and Loki Studios (develops games based on user’s location).  Most of the deals have been under $30 million.

Now Mayer has set her eyes on Tumblr.  Tumblr was founded in 2007 as a micro-blogging service.  Tumblr has raised $125 million from investors including Spark Capital, Union Square Ventures, Sequoia Capital, Greylock Partners, Insight Venture Partners and the Chernin Group.  Tumblr now has a reported valuation of $800 million and Yahoo’s current offer is $1.1 Billion in cash.  Mayer believes this acquisition is vital to turning Yahoo into a more mobile centered company.  Almost one quarter of Tumblr’s traffic now comes from mobile devices.   Last year Tumblr did over $13 million in advertising revenue and is now projected to do over a $100 million this year.

The deal is set to be finalized by Yahoo’s board tomorrow, however, Tumblr may be getting cold feet.  Executives at Tumblr now feel this offer may be too low.  Microsoft and Facebook have both expressed interest in buying tumblr.  Generally when large acquisitions are serious “lock-up” deals are put in place to prevent bidding wars from other companies.  However, Mayer will need to act quickly once her board approves the deal.

If the deal with Yahoo falls through would it make sense for Microsoft or Facebook to buy Tumblr?  For Facebook it may make sense.  Facebook needs to continually fight to stay relevant in the social networking space.  Facebook’s main revenue is comes from social advertising.  An extra $100 million in advertising revenue may help boost Facebook’s stock price.  The acquisition of Tumblr by Facebook would be a great defensive move, just as the acquisition of Instagram was.  However, Facebook could try to drive up the price of Tumblr which could put Yahoo in a more vulnerable position.

Now, on the other hand, an acquisition by Microsoft makes less sense to me.  Microsoft has not had too much success in the social networking space.  Their main source of revenue does not come from advertising either.  Microsoft’s only interest in Tumblr would be defensive.  Marissa Mayer is an uncontrollable factor unlike the previous two CEOs of Yahoo. It was recently reported she tried to get out of the Yahoo-Bing Search alliance deal, but was unable to.  A weaker Yahoo is good for Microsoft, and Microsoft may simply be trying to drive up the price of Tumblr.  Or Microsoft may want to help Facebook acquire Tumblr.  Microsoft may also be looking at acquiring Nook, and it is unlikely MS would do two large aquistions simultaneously.  Another unknown factor a Microsoft’s new CFO, Amy Hood.  Amy Hood is a former Goldman’s Sachs executive who helped Microsoft make some of its largest acquisitions including Yammer and Skype.  Sources close to Microsoft say she is one of the few people within the company who has Ballmer’s ear.  Microsoft has recently been trying to consolidate the company among their six major brands: Windows, Azure, Skype, Office, Bing, and Xbox.  Tumblr really fits nowhere into these, and also has no major enterprise play.

For any company that ends up buying Tumblr, it faces a large pornography problem.  There are literally thousands of tumblrs dedicated to posting porn pictures. (Of course I’m only speaking from second hand knowledge :p) This is problem that may scare away potential advertisers.  Another problem is Tumblr’s main audience is young hipster women.  There may be a point where tumblr isn’t “cool” anymore, and there goes all the site’s traffic.  Competition from other social sites is fierce too, for example Pinterest, which Yahoo is also looking at buying.

Ultimately for Tumblr I think their best bet is to go with Yahoo.  With Tumblr’s explosive growth, their expenses are currently outweighing their total revenue.  With Yahoo in a desperate position for direction and talent, Tumblr can structure the deal in such a way that they can maintain their independence from Yahoo while gaining financial stability.  For Mayer, Tumblr is a big bet, but something she needs to turn Yahoo around.  I think we’ll see a Yahoo-Tumblr deal finalized within the next couple days.

So will Microsoft buy Tumblr? I think the answer is clearly no.

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