A few Fridays ago, the Valley classes were chattering about Mailbox being acquired by Dropbox. Fast-forward to today, and those same classes are now chattering about Yahoo!’s potential purchase of Tumblr. On Twitter, I suggested that regardless of acquirer, the rumored $1.1B acquisition price struck me as undervaluing Tumblr. SoftTech’s Charles Hudson (who is a friend) asked me a good question on Twitter, one which I could not answer immediately but wanted to eventually, or at least attempt to. Here’s our conversation:
@chudson well, two diff q’s – overall feels undervalued at 1.1b, but “to yahoo” I don’t know – though it feels like a good deal for yahoo
— Semil (@semil) May 18, 2013
— Charles Hudson (@chudson) May 18, 2013
So, we have two questions:
- From Tumblr’s POV, is $1.1B too low, a great deal, or just right? and
- Is Tumblr worth $1.1B to Yahoo! and, if so, why and how?
Question 1 – If I were an early shareholder or founder in Tumblr, I would think $1.1B undervalues Tumblr right now as an acquisition target. The instinct among many observers is to approximate revenue projections and model a revenue stream, which produces some multiple. The statistic batted around here involved the $13m revenues booked by Tumblr in 2012, and then suggests the company is aiming for $100m in 2013. There’s no way to verify this, let alone it’s just a distraction anyway and probably leaked to the press for future positioning — case in point, this week. So, back to the early shareholders in Tumblr…if I were in that position, I would perceive the acquisition market for Tumblr to assign a value greater than $1.1B given the basic stats of the product today: Tumblr is ranked in The Top 20 highest traffic web sites in the U.S. (Alexa), is ranked in The Top 100 of iOS apps and near the Top 10 for Social Networking (AppData) and probably has tens of millions of mobile downloads (and growing) across iOS and Android, of which I’d assume a good percentage of those are at least reliable weekly active users. For a “blogging” platform, Tumblr’s mobile product and footprint seem unrivaled with the competition no where in sight. Then, there are the intangibles, such as young people using Tumblr as a place to be themselves or assume pseudonyms and avoid the watching eyes of elders, parents, teachers, etc. Yahoo! or not, and despite revenues that would not (yet) impress an Excel junkie, I’d have to believe a company like Facebook, or Microsoft, would want our New York-based team of engineers and designers, our brand, our mobile footprint, the reliable web traffic (which includes data tentacles into Twitter and Facebook).
Question 2 – This is a harder question for me personally to answer. All I can do is infer from Yahoo!’s moves over the last year during the Mayer regime. Buying Tumblr gives Yahoo! a team of great mobile and web designers and engineers based in New York City, where so much of media is bought and traded. It continues with Mayer’s acquisition strategy to help re-infuse the company with fresh talent and slowly siphon out the old guard. It gives them a reliable property with reliable traffic on the web (and trending up on mobile) to serve its ads to, as Yahoo! is an ad-content business without any social or pseudo-social graph. Buying Tumblr immediately puts a Yahoo! mobile property on tens of millions of mobile devices, where its user base is already trained to share their Tumblr content into other social channels where even more millions of people will see it. Charles’ question is a good one from the Yahoo-POV, and I don’t know exactly how they take their core ad business and extend it to Tumblr, but that has to be the crux of the strategy.
Therefore, given all this, I stay away from the numbers and look at the narrative. For Yahoo, $1.1B is a lot relative to their annual profits (especially in an all-cash deal), but I respect this bold move. For Tumblr, it’s a great outcome because they haven’t really turned from a product into a business, and unless one of the other big players wants to play, this may be the best — and only good — chance to exit. I don’t believe Tumblr has the leadership or mettle to really turn their traffic into stable revenue, and this may be outside of their core interests as they seem to be focused on design and engineering. There’s nothing wrong with that, which means this is the time to make the move. Ultimately, the value in a property, whether physical real estate or a web site or mobile app, isn’t what projections say it is, but what a willing buyer is willing to pay for it.