A Billion Dollars and a Promise Not to Screw It Up
On the twentieth of May, 2013, Yahoo put out a press release with a headline and a second line. The headline said Yahoo is going to buy Tumblr.
0:00 / 13:32
A Billion Dollars and a Promise Not to Screw It Up
Episode guide
On the morning of Sunday, May 19, 2013, Yahoo's board approved the purchase of the blogging platform Tumblr for about $1.1 billion, substantially all of it in cash. The company announced the deal the next day. Marissa Mayer had been chief executive for ten months. She had $4.3 billion of cash from selling half of Yahoo's stake in Alibaba, and a problem that cash could not fix on its own: Yahoo's share of American digital advertising had fallen from 15.5 percent in 2009 to 8.4 percent in 2012, while Google was taking about 41 percent. Tumblr brought 108 million blogs, 175 employees in New York, roughly 300 million monthly visitors — and about $13 million of revenue in 2012.
This episode reconstructs how that decision was made and what it produced. The negotiations ran less than a month, principal to principal, with no investment bank on Yahoo's side and Qatalyst Partners advising Tumblr. The price was roughly eighty-five times Tumblr's 2012 revenue. The announcement carried a second line under the headline, "promises not to screw it up," and a commitment to run Tumblr independently. That commitment set up a contradiction with the reason for the price: the whole thesis was that Yahoo's sales force would sell Tumblr's inventory.
Then it follows the accounting and the asset. Yahoo allocated $990 million of purchase price, $750.9 million of it goodwill. It projected more than $100 million of Tumblr revenue for 2015, and the finance chief later said the business did not deliver. Between 2015 and 2016, Yahoo wrote off $712 million of the acquisition. David Karp left in 2017, four and a half years after signing a four-year retention package. Verizon bought all of Yahoo's operating business for $4.48 billion, banned adult content on Tumblr in December 2018, and sold the platform to Automattic in August 2019 for about $3 million.
The counterfactual here is narrower than "Yahoo should not have bought it." Tumblr was in the market for a strategic investment and an advertising partner as much as for a buyer. A board could have bought a stake, signed an exclusive advertising and distribution agreement, and held an option on the rest priced against revenue milestones — the structure the comparable deals of the era used in some form. That version plausibly caps the loss at an option premium. It does not, the episode says plainly, fix Yahoo's actual problem.
What to listen for
- Why the decision is best understood as a multiple rather than a dollar figure: about eighty-five times 2012 revenue, and still eleven times revenue if the 2015 projection had been met exactly.
- What goodwill is, and why $750.9 million of a $990 million price sat in that line rather than in anything a buyer could point to.
- How "the promise not to screw it up" became a structural problem: independence preserved the audience, and independence was the reason the audience could not be sold.
- What the documented dissent actually was, given that no director is on record voting against the deal.
- What the disciplined counterfactual claims, what it costs, and where it stops: the same structure that limits the loss leaves Yahoo's advertising problem exactly where it was.
Evidence in this episode
Yahoo's press release, filed with the Securities and Exchange Commission on May 20, 2013, announced a definitive agreement to acquire Tumblr for total consideration of approximately $1.1 billion, "substantially all of which is payable in cash." It said Tumblr would be "independently operated as a separate business," with David Karp remaining chief executive. Under the headline "YAHOO! TO ACQUIRE TUMBLR" it printed the line "Promises not to screw it up." It described more than 300 million monthly unique visitors, 120,000 sign-ups a day and 50 billion blog posts, and said the combination was expected to grow Yahoo's audience by 50 percent to more than a billion monthly visitors. 1
The New York Times reported, in a story CNBC republished, that Yahoo's board agreed on Sunday to buy Tumblr for about $1.1 billion in cash. The deal surpassed Facebook's $1 billion purchase of Instagram the year before. The report also noted that Yahoo had $4.3 billion in cash from selling half its Alibaba stake. 2
The same report put Tumblr at more than 108 million blogs and 175 employees. It quoted BGC Partners analyst Colin Gillis calling the deal "not an inexpensive acquisition, but they're willing to pay to get back some of what they've lost," and adding: "They want to be hip." It recorded his warning that this management team would either turn Yahoo around "or be the ones that squandered its asset base." 2
The same report supplied the demand-side problem. Yahoo's share of all digital ad revenue had fallen to 8.4 percent in 2012 from 15.5 percent in 2009, while Google claimed about 41 percent, according to eMarketer. It put Tumblr's 2012 revenue at $13 million, noted an estimated $25 million of cash burned that year, and described difficulty raising more at an acceptable valuation. That difficulty, it said, had prompted Karp to open talks with Facebook, Microsoft and Google. Altimeter Group's Charlene Li framed the open question: "The challenge has always been, how do you monetize eyeballs?" 2
The New York Times DealBook reported that the negotiations were conducted largely through principals, and that the only bankers on the deal were on Tumblr's side: Qatalyst Partners, the boutique run by Frank Quattrone. Yahoo was advised by Simpson Thacher & Bartlett. The deal came together after less than a month of discussions. 3
DealBook ranked the purchase as Yahoo's fourth-biggest ever, behind Broadcast.com at $5.7 billion, GeoCities at $3.6 billion and Overture at $1.6 billion, according to Standard & Poor's Capital IQ. It also recorded that Tumblr had been "contemplating some sort of investment or tie-up with a strategic partner, hoping to gain additional distribution and ad sales support." Yahoo, it said, "worked hard to persuade Tumblr's founder, David Karp, that his start-up would remain independent and would not be harmed." 3
NPR, reporting the Wall Street Journal's account the day before the announcement, noted that GigaOm had argued a $1 billion valuation "may be a stretch" for a company that had revenues of less than $15 million the previous year. It also quoted the Times' warning that Yahoo's earlier acquisitions under previous chief executives, "including Geocities... and Flickr... have either been shuttered years later or neglected within the company." 4
Yahoo's quarterly filing for the period ended June 30, 2013 recorded the completion of the Tumblr acquisition on June 19, 2013, at a total purchase price of about $990 million. It recorded goodwill of $750,893 thousand, not deductible for tax purposes, and liabilities assumed of $113,847 thousand. Amortizable intangible assets came to $262.6 million. Of that, $182.4 million was allocated to customer contracts and related relationships, $56.5 million to the trade name and $23.7 million to developed technology, with useful lives not exceeding six years. The filing also stated that "operating results from the date of acquisition were not significant to the Company's consolidated results of operations." 5
Quartz read the same filing and reported that $751 million of the $990 million valuation was goodwill. Tumblr's tangible and intangible assets amounted to $353 million, against $114 million of liabilities. The filing also showed that Karp stood to make $81 million in cash and stock if he stayed at Yahoo for four years. 6
In October 2014, on Yahoo's third-quarter earnings call, Mayer said Tumblr's audience had grown 40 percent, from 300 million to more than 420 million users, with registered blogs nearly doubling from 105 million to 206 million. She also said she expected Tumblr to reach more than $100 million in revenue in 2015, with positive EBITDA. 7
Yahoo's 2015 annual report recorded a $230 million goodwill impairment charge against the Tumblr reporting unit. The same filing recorded $3,692 million for the U.S. and Canada unit and $531 million for Europe, and left $519 million of Tumblr goodwill on the books at the end of the year. 8 Quartz reported that on the fourth-quarter call chief financial officer Ken Goldman said the Tumblr business "did not deliver" on the revenue goal. 9
Yahoo's quarterly filing for the period ended June 30, 2016 recorded a $394,901 thousand goodwill impairment charge for the Tumblr reporting unit, leaving $124 million of Tumblr goodwill. It recorded a further $87,335 thousand impairment of definite-lived intangible assets in the Tumblr asset group. Both were attributed to declines in projected revenue, operating income and cash flows. 10 Business Insider reported the two charges together as $482 million, on top of the earlier $230 million. 11
Digiday's account of the integration, published in June 2017, described Yahoo's promise as "mostly true" until January 2015. That was when Tumblr's sales team was folded into Yahoo's sales division and Tumblr's head of brand partnerships left, followed by a sales exodus; Yahoo began rolling the integration back within a year. A former Tumblr executive told Digiday: "Yahoo never gave Tumblr the time and support to innovate ad products. By the time Yahoo realized how far in the race Tumblr fell behind, it was already too late." The same executive said: "Nobody at Yahoo ever understood what they bought and what Tumblr was." 12
CNBC reported that Verizon completed its $4.48 billion acquisition of Yahoo's core internet business on June 13, 2017. The price was $350 million below the original offer, after Yahoo disclosed two data breaches. 13
Mashable, citing SimilarWeb, reported that Tumblr's monthly page views fell from 521 million in December 2018 to 437 million in January 2019 and 369 million by February. That was a 29 percent drop after Tumblr banned adult content on December 17, 2018. 14
Axios reported that Verizon sold Tumblr to Automattic in August 2019 for a price multiple sources put at around $3 million. That was, in its words, "well less than 1% of what Yahoo originally paid." Tumblr still hosted around 450 million blogs. 15
The structural comparison comes from the two deals the market used at the time. Facebook's announcement of the Instagram acquisition, dated April 9, 2012, put total consideration at "approximately $1 billion in a combination of cash and shares of Facebook." 16 Google's announcement of the YouTube acquisition, dated October 9, 2006, described "$1.65 billion in a stock-for-stock transaction." 17
Yahoo's 2014 proxy statement records the May 2012 settlement agreement with Third Point LLC and its nominees Daniel S. Loeb, Michael J. Wolf and Harry J. Wilson. It also records their resignations from the board effective July 31, 2013. Those were the activist directors serving when the Tumblr purchase was approved. The same filing records Maynard G. Webb Jr.'s interim chairmanship from April 2013. 18
References
- 1
- 2
- 3
- 4
- 5
- 6
- 7
- 8
- 9
- 10
- 11Business Insider, Yahoo just wrote down another $482 million from Tumblr
businessinsider.com
- 12Digiday, 'Nobody at Yahoo understood Tumblr'
digiday.com
- 13
- 14
- 15
- 16Facebook, Facebook to Acquire Instagram
about.fb.com
- 17Google, Google To Acquire YouTube for $1.65 Billion in Stock
googlepress.blogspot.com
- 18
This story was produced automatically by a channel. One sentence is all it takes for Neodrop to keep producing for you.