Since Facebook (FB) came public about a year ago, deal-making in the social media space has been fairly sparse, whether in terms of IPOs or acquisitions. This week, though, we finally got an interesting deal: Yahoo’s (YHOO) $1.1 billion purchase of Tumblr.
Founded in 2007, Tumblr is a platform that makes it super easy for someone to create a social microblog. As of now, there are 184 million monthly unique visitors and many of them are fairly young. The company has also made great strides into mobile.
In other words, Tumblr could be big opportunity for Yahoo to boost growth and get some pizzazz. And, if you believe her, the company’s CEO Marissa Mayer also says that she promises not to “screw it up.”
Of course, that may not be an easy promise to keep. If anything, the social media space is fraught with risks. Just look at Zynga’s (ZNGA) acquisition of Omgpop. It came nearly at the peak of the firm’s traffic!
So to get some insight on the Tumblr deal, I had a chance to interview Ned Hill, who is the managing director at Mercury Fund — a venture capital firm that focuses on early-stage companies. During his career, he has invested in companies that have gone public as well as sold out to biggies like Hewlett Packard (HPQ) and Cisco (CSCO).
Here’s what he had to say:
Q: What are your initial thoughts on the Yahoo-Tumblr deal?
A: Let me start by saying that I am rooting for Yahoo. I want to see the former icon return to glory. That said, this situation reminds me of a perpetually bad sports team trying to turn it around by signing expensive free agents — like the Washington Redskins did for many years (Albert Haynesworth, Deion Sanders and son on).
Q: Do you think the apparent aggressive monetization approach to Tumblr, which seems to be different than Facebook’s approach to Instagram, looks promising?
A: It’s not clear to me just how aggressive Yahoo will be in monetizing Tumblr, but there’s no doubt it needs to be very careful. Tumblr users are already hyper-sensitive to the association with Yahoo. Yahoo’s best strategy will be to follow Google’s (GOOG) example with YouTube and think very long-term. The company shouldn’t play to Tumblr user’s fears of immediately trying to commercialize and monetize them. At this point, reputation is much more important than any perceived short-term monetization gain.
Q: Is the Tumblr acquisition a one-off transaction or will there be more deal-making?
A: Given this takes approximately a quarter of Yahoo’s available cash, the sheer size of this deal is likely a one-off. But Yahoo will clearly need to do more, but significantly less expensive, deals as part of a broader strategy of innovating around products and markets. Following the examples of today’s darlings — Apple (AAPL), Google, Facebook and Twitter — a combination of internal innovation and targeted, mostly small (inexpensive) acquisitions is the most likely path to re-establish itself in that list.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.