Yahoo is investing big time in the social space.Â After some speculation, the Internet giant revealed on Monday that it has purchased popular blogging and social media network Tumblr for $1.1 billion.
Yahoo CEO Marissa Mayer, 38, announced the deal on her own Tumblr blog this morning, promising “not to screw it up.” Â Mayer confirmed that Yahoo plans to operate the New York-based company independently with David Karp, 26, remaining as CEO. Â While Mayer has overseen the acquisition of companies such as Astrid and Summly, this is reportedly the largest acquisition under the chief executive’s belt to date, according to ABC News.
Mayer and the entire Yahoo Board, which voted on the acquisition over the weekend, are hoping this is just what the company needs to re-establish itself as a tech player. The partnership will not disrupt Tumblr’s product, however, the companies will work together on the advertising front, creating a large media network.
While some believe this is a step in the right direction for Yahoo, others are not sure the Yahoo-Tumblr deal is a successful union. Forbes contributor Peter Cohan argues that the Yahoo-Tumblr union has the makings of an unsuccessful acquisition; here’s why:
Tumblr isn’t bringing much to the table
“The first test of a successful acquisition is that the industry in which it competes is profitable – ideally more profitable than the industry in which the acquiring company participates,” writes Cohan.
Unfortunately, Tumblr’s industry of interactive advertising is less profitable than Yahoo’s display advertising industry. The Internet pioneer’s return on equity over the last five years averaged nearly 12%; while Tumblr reportedly lost $2 for every dollar of revenue it made last year, which indicates its losing money.