On May 19, Internet company Yahoo announced that it was purchasing the blogging service Tumblr for about $1.1 billion in cash. The acquisition could put a fresh face on the aging Internet company and provide it with a profitable revenue source—or it could turn out to be another instance of the Web pioneer overpaying for a start-up and failing to nurture it, as was the case after Yahoo bought Flickr and GeoCities.
The deal was the first major acquisition by Yahoo CEO Marissa Mayer since she took the helm of the company in mid-2012. Armed with a cash infusion of $4.3 billion from the sale of Yahoo’s stake in Chinese Internet company Alibaba, Mayer has been on a mission to make Yahoo relevant again. The company’s annual revenues have been a flat $5 billion for years, in large part due to its difficulty moving beyond personal computers to establish a strong presence on mobile devices.
Capitalizing on mutual need
Since its founding in 2007, Tumblr has raised millions from investors and spawned more than 108 million blogs. Yet the company’s founder, David Karp, has resisted placing many ads on the service. Tumblr, which was valued at $800 million in late 2011, earned only about $13 million in 2012 and struggled to raise additional funds, according to the New York Times.
Low revenues prompted Karp to open acquisition talks with technology behemoths Facebook, Microsoft, and Google. But it was Yahoo that most needed Tumblr. The blogging service has a proven track record of attracting users on mobile devices. And Yahoo plans to increase Tumblr revenues by placing new ads on the site, according to the Wall Street Journal.
Karp, who made about $250 million in the deal, reportedly was won over by Mayer’s promise to “let Tumblr be Tumblr.” He will stay on as chief executive, and Yahoo is expected to take a hands-off approach with Tumblr’s operations.
For Yahoo, the premium it paid for Tumblr comes with significant risk. Placing too many ads on Tumblr could threaten the site’s core audience, and the sizable number of adult-content blogs on Tumblr is unlikely to attract advertisers.
Unlike most acquisitions of its size, the deal was conducted with little involvement from bankers, the New York Times reports. Leading the talks for Yahoo were Mayer and Yahoo development chief Jackie Reses, with input from Chief Financial Officer Ken Goldman. Tumblr’s board retained boutique investment bank Qatalyst Partners as its adviser, but CEO Karp remained closely involved in the negotiations.
In this respect, the negotiation mirrored the last big social media acquisition, Facebook’s $1 billion takeover of photo-sharing start-up Instagram in April 2012. At the time, Instagram had only 12 employees and no revenue. Facebook founder and CEO Mark Zuckerberg personally hashed out the deal with his counterpart at Instagram, Kevin Systrom, over the course of a single weekend.
Bankers can play three important roles as advisers in mergers and acquisitions, according to Harvard Law School and Harvard Business School professor Guhan Subramanian. First, on the seller’s side, bankers can help position the asset in the marketplace, framing its value and marketing it to the universe of potential buyers. Second, bankers may draw on considerable experience running past deals to help the principals negotiate price and other deal terms. Third, bankers often keep the principals away from potentially difficult negotiations that could sour relations during the integration stage.
Why did Mayer choose to leave bankers out of the Tumblr deal? She may have felt that she had a strong sense of Tumblr’s worth; that her negotiating skills were up to the task; or that Karp would appreciate a more direct, informal approach. She may also have been aware that third parties can complicate talks, due to the financial incentives that bankers potentially have to advocate for deals even if they don’t seem likely to create value for their client.
Only time will tell whether it was a mistake for Mayer and Reses to negotiate without outside advisers. Yet the decision does raise the question of when negotiators should hand over control to bankers, lawyers, agents, and other third parties.
When you know little about the asset at stake or the context, it makes sense to hire experts to do your negotiating for you—as long as you carefully monitor their work, align their financial incentives as closely as possible with your interests, and question their advice.
If you find yourself resisting the idea of entrusting your deal to experienced third parties, you must seriously consider the possibility that you are overconfident in your ability to both negotiate the best deal possible and know when to walk away from one that is subpar.