YHOO: Did Yahoo Underpay For Tumblr?

Did Yahoo Underpay For Tumblr?
by Daniel Lauchheimer

A media storm ensued following Yahoo's (YHOO) $1.1bn purchase of blogging site Tumbr. As a part of this coverage, analysts and Yahoo management debated the logic (or lack thereof) behind the purchase, and how it would affect Yahoo's strategy going forward. Two of these interviews stood out for the sharp distinction they drew between the two sides of this debate. First, when asked if Yahoo overpaid for Tumblr RBC (RY) analyst Mark Mahaney said this, "you cannot justify this on a DCF, ROI basis" (40 seconds in). Second, when asked the exact same question, CEO Marissa Mayer responded, (1:10 in) "we actually did a lot of different analyses looking at things like DCF, discount to EBITDA, precedent transactions, and a lot of different methodologies and all those methodologies supported this valuation". A lot of people have weighed in on this matter, and landed on opposite sides of the debate. In this article, I, too, will join the fray and offer my own analysis. Specifically, I will draw a comparison between social media sites -- like Tumblr -- and compare them to the network TV stations -- CBS, NBC, FOX, ABC. I will argue that both of these types of media properties offer users/viewers/customers free content in exchange for their eyeballs. I think by examining the valuations for the network TV stations, and using that as a basis of comparison for social media sites in general, and Tumblr specifically, we can begin to understand the logic behind Yahoo's transaction. read more »

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