SAN FRANCISCO (Reuters) - Yahoo Inc Chief Executive Marissa Mayer’s $1.1 billion acquisition of blogging service Tumblr will be a test of her ability to revive the aging Web portal. Luckily for her, her performance may be graded generously.
Mayer faces plenty of challenges in her efforts to turn six-year-old Tumblr into a money-spinner, not least among them retaining users while devising new types of non-intrusive online ads outside of Yahoo’s traditional area of expertise.
And then there is Tumblr’s hefty price tag: a sum that equates to a fifth of Yahoo’s cash.
But some investors and analysts say that Wall Street is more focused on the rising value of Yahoo’s Asian assets, such as its 24-percent slice of China’s Alibaba, than on actual business operations. That means the 37-year-old executive faces less immediate pressure to prove that Yahoo’s biggest acquisition in years is a profitable one.
“Overall I‘m relatively skeptical, but I don’t think it matters much to the stock,” Macquarie Research analyst Ben Schachter said of the deal.
“Say they destroy 100 percent of the value and drive Tumblr into the ground. It’s probably less than a dollar per share in value,” he said.
If Mayer’s bet delivers, however, some investors say it could provide even more upside to a stock already trading at its highest levels in years.
“The core business is the lottery ticket,” said Ryan Jacob, the chief executive of the Jacob Funds, who owns Yahoo shares.
“Investors’ expectations for the core business are very low, so if they’re able to reinvigorate growth, that will move the needle,” said Jacob.
Yahoo’s stock finished Monday’s regular trading session up 6 cents at $26.58. Its shares have surged roughly 70 percent since Mayer became CEO in July, largely due to stock buybacks and the rising value of its Asian investments, which also include Yahoo Japan.
Yahoo remains one of the Web’s most popular destinations, but has seen its revenue shrink in recent years as consumers and advertisers favor rivals Google Inc and Facebook Inc. By buying Tumblr, Yahoo gets a much-needed platform in social media to reach a younger generation of users less enamored of Yahoo’s traditional Web content and email.
Yahoo is paying a rich premium for Tumblr, whose nascent advertising efforts generated a scant $13 million in revenue last year, according to media reports.
“Tumblr has low revenues and a big multiple, but far-sighted buyers in technology have shown that they can take small properties and put them onto their distribution system and do good things with them,” said Adam Seessel, head of Gravity Capital Management, which owns Yahoo shares.
Take Google’s $1.6 billion acquisition of YouTube. That deal gave the search giant an important video service that boosted interaction with Google’s other online services, he said by way of example.
Facebook’s acquisition of photo-sharing service Instagram for more than $700 million is considered another deft move by technology observers, allowing the social network to scoop up a fast-growing threat to its business - even if the ad-free service hasn’t delivered a financial boost to Facebook yet.
For every YouTube and Instagram there is a MySpace, the once-red-hot social network News Corp acquired for $580 million in 2005 but whose popularity plunged when its new parent plastered ads all over the service in a rush to monetize.
Mayer stressed Yahoo’s commitment to create new so-called native ads that mesh seamlessly into Tumblr’s content and are considered more suited to the service than the traditional online display ads that have long been Yahoo’s bread-and-butter.
“We have gotten more and more focused on providing native ads and designing ads for that experience, so that’s what we’re going to get really focused on,” Mayer, a former Google executive, told Reuters in an interview late on Monday.
But creating a class of ads that works is no simple feat.
“There isn’t a template to do it,” said Rebecca Lieb, an analyst with research and consulting firm Altimeter Group, who explained that native ads is a catch-all encompassing everything from advertorials to sponsored tweets that appear in Twitter.
While Yahoo recently began experimenting with news stream ads on its redesigned home page, doing native ads on a broad scale could be tricky given the challenge of convincing brands and agencies to experiment with formats, Lieb said.
Yahoo must also hold onto Tumblr’s bloggers, many of whom were already stomping their feet at being assimilated into the decidedly “less cool” Yahoo. Many vented their frustrations on the Tumblr blog entitled “Meltdowns about Yahoo buying Tumblr.”
Defections have begun. As reports of the deal spread on Sunday, the founder of WordPress, a rival blogging platform, said it “imported” 72,000 Tumblr blogs in a one hour period.
Yet for many investors, those questions are secondary to the impending IPO of Alibaba Group, which they say is one of the key factors buoying Yahoo’s stock. Analysts and investors estimate the value of Alibaba to be around $70 billion. But Lawrence Haverty, a fund manager with GAMCO Investors, believes it could be worth $100 billion or more when it goes public.
In the event Alibaba’s IPO does not live up to expectations, the fallout for Yahoo will be far more serious than anything that happens with Tumblr.
Reporting By Alexei Oreskovic; Editing by Jeremy Laurence