When Yahoo acquired Tumblr for a total of $US1.1 billion, we knew that much of that purchase price was based on the promise of Tumblr, not what Tumblr has historically delivered.
The company had focused on building its user base, and had only begun testing advertising on the platform when Yahoo CEO Marissa Mayer stepped in and acquired David Karp’s photo blogging/social media site.
Today we learned just how much that “promise” was worth to Yahoo: $US750 million.
Here’s a breakdown of Yahoo’s valuation of Tumblr’s assets:
The fact that there is only $US16.5 million in cash on the books after it raised $US125 million from investors suggests that the business was bleeding cash before Yahoo stepped in.
The “customer contracts and related relationships” line is interesting too. It’s valued at $US182 million. We’d previously heard that Tumblr had managed to sell only $US13-$US25 million in ads in 2012. So the newer, $US182 million valuation of customer contrasts suggests that Tumblr’s business was expected to grow rapidly.
But it’s the $US750 million in “goodwill” that is most staggering. Goodwill is an accounting concept that measures the difference between the price of things that can actually be valued with reasonable dollar numbers — like cash in the bank and contracts in hand — and what the acquirer is paying in total. It’s the price of the overpayment it took to lock up the deal, in other words.
In this case, the premium is several multiples the size of Tumblr’s actual business.
We think Tumblr can be a powerful advertising platform, once it is ramped up properly. It has similar potential to Facebook’s: Ads can go viral as content within the Tumblr platform or they could be served against targeting metrics in users’ news feeds, with an ad exchange. Tumblr hasn’t quite figured out either of those methods yet, however. But with Yahoo’s help, it is likely well on the way.
Whether it’s on the way to generating the $US750 million Yahoo needs to make this deal worthwhile remains a big question mark, however. Because it is goodwill, that is roughly the number Yahoo will be required to write down against its income statement if, for some reason, Tumblr fails to grow its revenue base to near that size.
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