According to some reports, Yahoo is planning to buy Tumblr, a blogging site, for $1B on Monday, and don’t you love how the media is freaking out? Are such acquisitions over-blown? or is it a smart investment that every big player in the industry should consider?
I found the following article regarding the announced acquisition by Jason Calacanis very interesting. He explains why big companies need to make more bets like this, why Yahoo is the perfect home, and why Zuckerberg should offer twice the amount!
Yahoo + Tumblr = Big Win
by Jason Calacanis
Media… Freak Out!
Over 20 years in the industry I’ve learned that when something gets bought for $1B or more, people tend to freak out.
People can comprehend millions of dollars, because we all know folks who have a million or more dollars (or homes worth that). When you start talking about 100s or 1,000s of millions, people get emotional and some start lashing out.
Journalists are one of the first groups to lash out. Why? Because they have no chance of making big money in their jobs, and they have to fight for $5k raises while their pensions are replaced with 401ks. Also, they tend to have covered startups like Tumblr from year one and they can’t reconcile how something that didn’t exists five years ago is now worth $1B — and that they don’t have to balls to create something.
F@#4k It, Yahoo Should Buy 10 Tumblrs
Here’s the truth: a billion dollars is nothing to a company like Yahoo or Google or Facebook or Apple or Microsoft.
If there were 10 startups like Tumblr, with 100M+ users and $50M-$100M in revenue potential a year, it would actually make sense for Google, Yahoo or Facebook to buy all 10.
Roll the dice.
Because those companies have tens to hundreds of billions of dollars in market cap and cash, and if one in 10 of those startups turn into YouTube, it’s worth it.
For background, Google bought YouTube for $1.6B5 in October 2006, after 20 months in business. It now has 1B monthly users in year eight. If YouTube were a stand-alone business that IPO’d it would now be worth AT LEAST $50B, but I would say north of $100B based on potential.
A hookup with Yahoo makes complete sense because Yahoo has massive scale in advertising and with users. Yahoo could easily grow Tumblr’s user base by 3x and revenue by 10x in two years. That means Yahoo’s footprint makes Tumblr 4x bigger in a year.
Just like Google made YouTube 50x more valuable in the six-and-a-half years since buying it.
Or Google bought Android for an estimated $50M back in 2005. Android just announced it has 900M devices activated — compared to Apple’s iOS device count of ~560M (as of Q2 ’13).
Oh yeah, Yahoo almost bought Facebook for $900M back in 2006. If it had, Yahoo would now be Google.
And Google almost bought Yelp for $550M in 2009. Yelp is now worth ~$2B.
You need to risk a Geocities or Bebo to get a YouTube, and if you get a YouTube you win.
Zuck Needs to Step It up
If I’m Zuckerberg I’m waiting in a Sprinter outside of Tumblr’s office with three things:
1. a term sheet for $2.2B: $1.1B in cash to match Yahoo’s offer and $1.1B in Facebook stock as the gravy.
2. Kevin Systrom from instagram.
3. Sean Parker and Chamath Palihapitiya.
4. Joshua Schachter and Caterina Fake.
a) Paying 2% of Facebook’s net worth for a product that teenagers love, when teenagers are starting to hate Facebook, is an awesome hedge. If it turns out that social networks are generational, it’s a super slick move to own a portfolio of social networks that share common infrastructure like advertising, hosting and user data.
b) Kevin Systrom got 2x Twitter’s offer for Instagram last year, and Zuck has left Kevin alone. He’s the perfect person to pitch for Zuck.
c) Sean Parker set up Zuck as the invincible “God King” of Facebook. Zuck controls everything because Parker showed him how. Chamath showed Zuck how to focus and scale. These two are now doing huge things in the world and can show the Tumblr founder what life is like ‘after Zuck.’ Which is to say, awesome.
d) Zuck should invest in Joshua and Caterina’s startups with a blank check, make them Facebook advisors for $100k each a year and then have them in the Sprinter. Have them tell David Karp exactly what it was like inside of Yahoo and how they feel about their babies being abused post-sale. How heart-breaking it was. This is totally dirty and unfair to Marissa, but it is COMPLETELY fair to Yahoo — which has a horrible track record with founders.
If Zuckerberg pulls this off, he is hands down the greatest M&A executive on the planet: bold, cunning and founder-focused.
Zuck has nothing to lose. If Tumblr is a complete ‘Bebo’ (aka what we call a failure in the business), it has zero impact on him.
Marissa? Not so much. Everyone will second-guess her and base her term as Yahoo CEO on this acquisition. That means she is going to be all up in David Karp’s business — she can’t afford not to be.
Q: Why Didn’t Anyone Complain about Yammer @ $1B?
Yammer was a SaaS enterprise service with subscription revenue. Subscription revenue from enterprises takes decades to lose typically. Advertising revenue in a social network? That tends to vaporize overnight.
Tumblr, or any ad-driven business, carries 10x the rate of something a big company pays for on a yearly basis.
Q: Shouldn’t Karp Pull a Houston?
Drew Houston and Dropbox famously turned down $1B (or more) from Steve Jobs. It was valued at $4B when it raised $250M in 2011.
Should Karp do the same?
I don’t think so. Blogging platforms and social networks are risky businesses. Sure, WordPress.com has chugged along building more and more value, but MoveableType, Pownce, Friendster and countless others became roadkill.
$1.1B is a massive return and while there might be more upside, I don’t see it making up for the massive risk.
Conclusion: 80% Yahoo gets the deal done, but don’t count out Zuck. Well done Karp and investors.
What do you think? Do you agree or disagree?