On May 19, 2013, internet company Yahoo announced it was purchasing the blogging service Tumblr for about $1.1 billion in cash. The acquisition was intended to put a fresh face on the aging Internet company and provide it with a profitable revenue source. But those plans didn’t play out: In August 2019, Tumblr was bought for just $3 million. The story of what went wrong highlights deal-making pitfalls that you should seek to avoid when making business deals.
Would a Deal “Ad” Up?
David Karp founded blogging platform Tumblr in 2007 as a video-friendly alternative to WordPress. The site caught on among bloggers, photographers, and the fashion world, but Karp resisted placing many ads on the service. Tumblr earned only about $13 million in 2012 and struggled to raise additional funding, according to the New York Times.
Low revenues prompted Karp to open acquisition talks with Facebook, Microsoft, Google, and Yahoo. Yahoo valued Tumblr most, for its ability to attract users on mobile devices. Yahoo’s annual revenues had been flat for years, and Yahoo’s new CEO, Marissa Mayer, was on a mission to make the company relevant again.
“Yahoo was making a speculative bet on future revenues that could in theory be achieved by tapping into the ‘millennial’ audience early,” investment bank Oaklins DeSilva+Phillips managing director John Matthews told Digiday.
Leaving the Bankers Behind in Deal-Making
Unlike most acquisitions of its size, the deal-making between Yahoo and Tumblr was conducted with little involvement from bankers, the New York Times reports. Bankers can play three important roles as advisers in merger-and-acquisition (M&A) negotiations, 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 potential buyers. Second, bankers often have considerable experience running past deals to help negotiate deal terms. Third, bankers often keep the principals away from potentially difficult negotiations that could sour relations during the integration stage.
Why were bankers left out of the Tumblr deal-making? Mayer may have felt she had a strong sense of Tumblr’s worth or that Karp would appreciate a more direct, informal approach. Moreover, third parties often have financial incentives to advocate that aren’t likely to create value for their client.
After acquiring Tumblr, Yahoo needed to figure out how to attract ad dollars to the platform to allow it to compete with rising social media giants such as Twitter, Facebook, Instagram, and Snapchat. But Yahoo initially took a hands-off approach to Tumblr’s operations.
“Yahoo never gave Tumblr the time and support to innovate ad products,” one former Tumblr told Digiday. “By the time Yahoo realized how far in the race Tumblr fell behind, it was already too late.”
Yahoo eventually integrated Tumblr’s sales team into the larger company, but the Tumblr team was unhappy with Yahoo’s more stodgy corporate culture. After just a year, as Tumblr failed to meet ambitious sales goals, Yahoo started to roll back the sales integration.
“Nobody at Yahoo ever understood what they bought and what Tumblr was,” a former Tumblr executive told Digiday. “If you don’t understand something, how can you sell it?”
Yahoo ended up writing off most of Tumblr’s value. In 2017, Verizon acquired Yahoo, making it Tumblr’s new owner. And in August 2019, WordPress owner Automattic acquired Tumblr for the bargain-basement price of $3 million.
Yahoo’s failed Tumblr acquisition suggests three questions to answer carefully when considering how to negotiate a deal for a new business partnership:
- What are the risks? The “winner” of a commodity of uncertain value is often the party that overpays the most, as was evident in the M&A negotiation tactics used in Yahoo’s acquisition of Tumblr. Thorough due diligence is needed to make sure you reach a clear-eyed assessment of the likely risks, benefits, and pitfalls of a new business partnership.
- Do we need help? When you know little about the asset at stake or the context of a potential negotiated agreement, it often 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.
- How can we set ourselves up for success? When negotiating new partnerships, parties too often fail to discuss in-depth how they can set themselves up for success. During the deal-making process, in-depth discussions about the implementation stage are at least as important as talks about the purchase price.
What other deal-making missteps have you learned from?