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Yahoo buying Tumblr for $1.1 billion in cash

Deal may help Web giant catch up in social media

Tumblr was founded in February 2007 by David Karp, who is 26. According to its latest statistics, it has 175 employees and has raised more than $125 million in venture funding.

AFP/Gerry Images/Photo illustration

Tumblr was founded in February 2007 by David Karp, who is 26. According to its latest statistics, it has 175 employees and has raised more than $125 million in venture funding.

NEW YORK — The board of Yahoo Inc., 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, expected to be announced as soon as Monday, would be the biggest acquisition of a social networking company since Facebook paid $1 billion last year for Instagram, the photo-sharing site.

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For Yahoo and its chief executive, Marissa Mayer, buying Tumblr would be a bold move as she tries to breathe new life into the company. The deal, the seventh since Mayer defected from Google last summer, 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 and many highly active users.

Yet a basic question about Tumblr and other social media sites remains: Can they make money?

Founded six years ago, Tumblr has attracted a loyal following and raised millions from big-name investors. Yet it has not proved it can be profitable, or succeed on mobile devices, which are becoming the gateway to the Internet. Even Facebook faces continued pressure from investors to show it can adapt to the mobile world.

“The challenge has always been: How do you monetize eyeballs?’’ said Charlene Li, founder of Altimeter Group, a consultancy. ‘‘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.’’

Six-year-old Tumblr is one of the most popular blogging services, with more than 108 million blogs. Buying it could provide a wealth of user-generated content for Yahoo.

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Yahoo declined to comment. Tumblr did not respond to requests for comment.

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

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.

And, 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.’’

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

But in some ways, Yahoo is not pursuing users — it already claims 700 million — but products and services to again make it a central destination.

Once the biggest seller of display ads in the United States, Yahoo has ceded market share to Google and Facebook. Its share of digital ad revenue had fallen to 8.4 percent last year, from 15.5 percent in 2009, even as total advertising spending grew, according to eMarketer. Google claims 41 percent.

The company also missed the shift from the Web to smartphones and tablets. It waited a long time to roll out apps for its most popular services, missing chances to win users.

And while Yahoo has managed to grow internationally, it has struggled to make its brand relevant again. Until a recent renovation, the 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 experts say is a bounty of unsold ad inventory. Karp had eschewed advertising in favor of a minimalist approach, starting to serve users ads only last May.

Karp, Tumblr’s chief executive, is expected to get nearly $250 million in the deal. Spark Capital, the Boston 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. The site burned through an estimated $25 million in cash last year and struggled to raise additional money at an acceptable valuation, said 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.

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