Yahoo’s board agrees to buy Tumblr for about $1.1b, sources say

The board of Yahoo, the faded Web pioneer, agreed Sunday to buy the popular blogging service Tumblr for about $1.1 billion in cash, people with direct knowledge of the matter said, a signal of how the company plans to reposition itself as the technology industry makes a headlong rush into social media.

The deal, which is expected to be announced as soon as Monday, would be the largest acquisition of a social networking company in years, surpassing Facebook’s $1 billion purchase of Instagram last year.

For Yahoo and its chief executive, Marissa Mayer, buying Tumblr would be a bold move as Mayer tries to breathe new life into the company. The deal, the seventh since Mayer defected from Google last summer to take over the company, would be her biggest yet.


It is meant to give her company more appeal to young people, and to make up for years of missing out on the revolutions in social networking and mobile devices. Tumblr has more than 108 million blogs, with many highly active users.

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Yet even with all those users, a basic question about Tumblr and other social media sites remains open: Can they make money?

Founded six years ago, Tumblr has attracted a loyal following and raised millions from big-name investors. Still, it has not proved that it can be profitable, nor that it can succeed on mobile devices, which are becoming the gateway to the Internet. Even Facebook faces continued pressure from investors to show it can increase its profits and adapt to the mobile world.

‘‘The challenge has always been: How do you monetize eyeballs?’’ said Charlene Li, the founder of the Altimeter Group, a consulting firm. ‘‘Services like Instagram and Facebook always focus on the user experience first. Once that loyalty is there, they figure out how to carefully, ideally, make money on it.’’

A Yahoo spokeswoman declined to comment. A representative for Tumblr did not respond to requests for comment.


If the deal is approved, Mayer will face the challenge of successfully managing the takeover, given Yahoo’s notorious reputation for paying big money for startups and then letting the prizes wither. Previous acquisitions by Yahoo, like the purchase of Flickr for $35 million and a $3.6 billion deal for GeoCities, an early pioneer in social networking, have been either shuttered or neglected within the company.

Because of this, Mayer will face pressure to keep Tumblr’s staff, led by its founder, 26-year-old David Karp, who dropped out of high school at 15. It is unclear whether all of Tumblr’s 175 employees, based in New York City, will move over to Yahoo.

At the same time, analysts and investors are likely to question whether buying a site that has struggled to generate revenue makes sense.

‘‘This is not an inexpensive acquisition, but they’re willing to pay to get back some of what they’ve lost,’’ said Colin Gillis, an analyst at BGC Partners. ‘‘They want to be hip.’’

In her short tenure as chief executive, Mayer has bought a string of tiny startups. Most of those were aimed at buying engineering talent that could help freshen Yahoo’s core products, like mail, finance and sports, as well as build out new mobile services.


But Mayer has had ambitions to hunt bigger game, armed with $4.3 billion in cash from selling half of Yahoo’s stake in the Chinese Internet titan Alibaba.

She has had conversations with a number of other big-ticket targets, like Foursquare, a mobile app that lets users find nearby restaurants, stores and bars, and Hulu, the video streaming service, according to people with knowledge of those discussions who were not authorized to speak publicly.

Tumblr brings something that Mayer has sought for some time: a full-fledged social network with a loyal following. The startup reaches 44 million people in the U.S. and 134 million around the world, according to Quantcast.

But in some ways, Yahoo is not pursuing users — it already claims 700 million, one of the biggest user bases on the Web — but products and services that would again make it a central destination.

Once the biggest seller of display ads in the U.S., Yahoo has lost market share to the likes of Google and Facebook. Its share of digital ad revenue has tumbled to 8.4 percent last year, from 15.5 percent in 2009, even as total advertising spending grew, according to eMarketer. Google now claims about 41 percent.

The company also missed the shift from the Web to smartphones and tablets. It waited a significantly long time to roll out apps for its most popular services, missing out on chances to harvest users to competitors like Google and Apple.

And while Yahoo has managed to grow internationally, it has struggled to make its familiar brand relevant again. Until a recent home page renovation, the company’s main page felt claustrophobic, with ads and content jumbled together.

Tumblr’s trove of users and pages could provide fertile new ground for Yahoo’s advertising operations, with what industry experts say is a bounty of unsold ad inventory. Karp of Tumblr had eschewed advertising in favor of a minimalist approach, only starting to serve users ads last May.

Karp, Tumblr’s chief executive, is expected to get nearly $250 million from the deal. Spark Capital, the Boston-based venture firm, has been involved in five investment rounds of Tumblr’s financing and is expected to make tens of millions of dollars from the deal.

Yet it is not clear how much Tumblr can help Yahoo reach its goals. The blogging site burned through an estimated $25 million in cash last year, and struggled to raise additional money at an acceptable valuation, according to people briefed on the matter who were not authorized to speak publicly about it. That prompted Karp to begin deal discussions with a number of companies, including Facebook, Microsoft and Google, though nothing came of those talks.

Yahoo and Tumblr have been in serious talks since last week, culminating in the Yahoo board’s voting to approve the deal on Sunday morning.

The blogging site has been trying to create new advertising efforts like interactive campaigns, rather than relying on standard clickable ads, with mixed success. Though it has set a revenue target of $100 million for this year, the company reported only $13 million for the first quarter. It reported $13 million in revenue for all of 2012.

Despite its ranking as the 24th-most-viewed website on the Internet, according to Quantcast, Tumblr has yet to translate that into success on mobile devices, something Yahoo strongly wants.

Tumblr also bears a fair amount of unsavory content that may unsettle advertisers. Pornography represents a fraction of content on the site, but not a trivial amount for a site with 100 million blogs.

The search for profits is not unique to Tumblr, as free apps and services struggle to wring money from their users. Instagram famously generated no money when Facebook bought it.

Gillis of BGC said. ‘‘Either this management team is going to turn Yahoo around or be the ones who squandered its asset base.’’

Andrew Ross Sorkin and Jenna Wortham contributed reporting.