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Sat, 25 May 2013 14:15:00 GMT | By Deirdre McMurdy, MSN Money

Will Yahoo! ruin Tumblr’s cool?

The key to the Yahoo!/Tumblr deal is leaving the acquisition alone.

Deirdre McMurdy

When a man marries his mistress, he creates a vacancy.

Those words of experience and wisdom, courtesy of late Anglo-French financier Sir James Goldsmith were not intended as corporate commentary. But it’s hard to think of anything more apt to describe the marriage of dowdy Yahoo! and its hip, new trophy wife, Tumblr.

In a proactive post-nuptial statement, Yahoo! promised that it won’t “screw up” Tumblr — and that Tumblr will continue to operate as an independent entity — when the $1.1-billion acquisition closes. But the reasons that drove the deal in the first place will inevitably diminish the cool for which Yahoo! has paid a rich premium.

As it is in such relationships, there’s no question that the older partner is desperate for the cachet that comes with youth and glamour. Neither is there much question that as soon as there’s a five-carat diamond on the ring finger, the party in question loses any cred as a badass. (Although, arguably, a honking diamond ring isn’t a bad trade.)

That’s the only way to explain why Yahoo! paid over a billion dollars for the privilege of consorting with a relative upstart that posted sales of just $13 million last year. An upstart that has, furthermore, had limited success rolling out its advertising proposition to date.

In other words, Yahoo! is paying 85 times earnings for Tumblr — a multiple the likes of which hasn’t been seen since the tech bubble days of 2000. (LinkedIn is valued at 18 times earnings and Zillow at 14 times earnings.)

The rationale?

Yahoo!’s online advertising revenue has been under extreme pressure from Google and Facebook: in the first quarter of this year its revenue shrank by 11 per cent to $1.1 billion. The clear intent is that Tumblr’s 117 million monthly users, 108 million blogs and 51 billion posts will bump up Yahoo! traffic and — more importantly — hold user eyeballs longer.

The magic — if there’s going to be any — lies in Yahoo!’s ability to execute. CEO, Marissa Mayer will have to quickly expand Tumblr’s reach to its base of 700 million older users and, at the same time, draw in advertisers who want to access Tumblr’s young blogger demographic.

To be more precise, analysts say that Tumblr has to earn $100 million to bring it into line with the valuation of other social media companies out there — no small feat in a notoriously fickle sector.

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