A few people have asked for my opinion about the Yahoo! purchase of Tumblr.

Short version: this is a “bet the farm” deal. Y! has (at last report) $1.2 billion in cash on hand, and this is an all-cash $1.1 billion deal. If anything goes wrong elsewhere, they’ll need to raise cash in a hurry, which would be costly.

This looks to me something like Google’s purchase of YouTube, which isn’t all that surprising given where Marissa Mayer’s playbook originates from.

A SWOT analysis would probably go something like this:

Strengths:

• Tumblr has a large amount of (youthful) traffic
• It doesn’t cost much to run (reportedly $25 million last year)
• It is almost at the break-even point already; given access to Y!’s ad network, it can hopefully make money for them from day one.

Weaknesses:

• Potential damage to reputation, or liability – Tumblr has an NSFW reputation.
• That’s most of Y!’s cash. If something goes wrong elsewhere in the company, they’ll need to raise money quickly, which will be costly.
• This values each tumblelog (their name for blogs hosted there) at $10 (i.e. around 100 million logs in existence – see here for usage stats). Remains to be seen how much revenue can be driven on average per log. They were assuming $100 million in revenue in 2013, which implies $1/log/year.

Opportunities:

• Big. If things go well (like they eventually did for Google with YouTube), this could put Y! back in the game. Bear in mind that it took a goodly number of years for YouTube to break even, but then their cost of operations is much larger due to the vast amount of storage required. If things work out, this a) provides a large new source of traffic to advertise to, and b) reduces the average age of Y!’s users.
• Access to Tumblr’s talent. Assuming that they hang around. With 175 staff, this amounts to a purchase price of $6 million per staff member, so that’s evidently not a primary driver of this transaction.

Threats:

• As previously stated – potential for reputational damage or lawsuits.
• Opportunity cost – if another deal comes along, they won’t be in good position to take it, since this eats up a lot of their cash on hand. They’ve mostly been making small purchases of late though, so this isn’t likely a significant issue for them.
• This would be a good time for one of their competitors to launch a targeted attack, given their reduced resources. If somebody with a lot of cash launched (or acquired) a competitor to Tumblr (or any of Y!’s other cash cows), and was willing to sink money into building it, it could hurt Y! badly, and they would have a harder time responding.

All in all, I suspect only time will tell if this was a good move or not. I certainly get why it was done. They should probably have tried harder to reduce the cash component of the deal, in order to provide a larger margin for error.

Update: A reader pointed out that the recent sale of part of Y!’s Alibaba holdings should have increased their cash to $5.4 billion. I went and looked up their most recent 10-Q filing on EDGAR (relevant page here), from 7th May 2013. As of 31st March 2013, they’re reporting $1,174,633,000 in cash and cash equivalents. I’m assuming that the Alibaba deal only officially goes through in a later reporting period, or that the cash is staying in China for now, and is thus somehow excluded from this filing. If anyone can clarify this, I’d be interested to know.