The Wall Street Journal is reporting that Yahoo! Inc. (NASDAQ:YHOO) will purchase Tumblr in an all-cash transaction for $1.1 billion. Under the agreement, Tumblr would continue to operate largely independently. While no one knows exact numbers now many believe such a valuation is high, however, the combination of Tumblr’s growing usage and Yahoo!’s ad technology could present an opportunity to improve user monetization over time. Additionally, many pundits are not concerned about the problem with Tumblr’s alleged large amount of pornographic websites. Shockingly (with a dose of sarcasm) analysts at Barclays see cost synergies from the transaction.
Barclays Take: Yahoo! Inc. (NASDAQ:YHOO) Purchase of Tumblr
Analysts at Barclays believe this reported acquisition shows the willingness of Yahoo!’s management team to be proactive in making moves that can bolster the company’s user engagement. Tumblr should contribute meaningfully to user engagement for Yahoo!; the site had over 116M desktop unique visitors in April (+85% Y/Y, comScore). Tumblr should also bolster Yahoo!’s position in mobile, as its 14.5 million mobile unique visitors in the US (+227% Y/Y, comScore) give Yahoo! a large and rapidly growing mobile audience. Moreover, they believe integration into Yahoo!’s advertising and technology platforms can drive much deeper user monetization for Tumblr. Barclays alsos sees “some cost synergies for the business by hosting Tumblr’s data on Yahoo!’s servers”.
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Analysts at Barclays “acknowledge that it is difficult to justify the premium acquisition price for Tumblr given its low levels of revenue. Thus, we believe this reported acquisition carries execution risk in terms of Yahoo!’s ability to monetize Tumblr in a way that justifies this valuation.”
Analysts believe Yahoo! needs to be careful about the manner in which it monetizes Tumblr, as a significant ad load and the perception of a large corporate owner could potentially alienate Tumblr’s core user base. Though Tumblr’s model does have switching costs for users, its actual barriers to entry may not be too particularly high.
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