Yahoo is buying online blogging forum Tumblr for $1.1 billion as chief executive Marissa Mayer tries to rejuvenate an Internet icon that had fallen behind the times.
The deal - announced today - represents Mayer's boldest move yet since she left Google ten months ago to lead Yahoo's latest comeback attempt.
It marks Yahoo's most expensive acquisition since the Sunnyvale, California, company bought online search engine Overture a decade ago for $1.3 billion in cash and stock.
Yahoo is paying all cash for Tumblr, dipping into some of its remaining stash from a $7.6 billion windfall reaped last year from selling about half of its stake in Chinese Internet company Alibaba Holdings Group.
Taking over Tumblr will devour about one-fifth of the $5.4 billion in cash that Yahoo had in its accounts at the end of March.
Yahoo also said that "per the agreement and our promise not to screw it up, Tumblr will be independently operated as a separate business" with David Karp staying on as chief executive.
Tumblr, a service started six years by Karp, a high school dropout, now figures to play a pivotal role in Mayer's attempt to reshape Yahoo.
To take on the challenge, Mayer ended a highly successful 13-year career at Google, which she helped surpass Yahoo as the Internet's most influential company.
Since coming to Yahoo, Mayer has concentrated on improving employee morale, redesigning services and bringing in more engineering talent through a series of small acquisitions that have collectively cost less than $50m.
Her efforts have been well-received on Wall Street so far, although most of the 69% surge in Yahoo's stock price under Mayer's leadership has been driven by the rising value of Yahoo's remaining 24% in Alibaba. When Alibaba goes public within the next few years, analysts have estimated Yahoo could collect another $10 billion to $20 billion by selling the rest of its Alibaba stock.
Deal may help Yahoo share price back to $33
If this deal pays off the way Mayer envisions, Tumbler could help Yahoo finally get its stock price to $33. That would be a major coup because many investors soured on Yahoo after a previous regime led by co-founder Jerry Yang squandered an opportunity five years ago to sell the entire company to Microsoft for $33 per share.
The stock spent over four years trading below $20 before the recent surge that lifted the price to $26.69 by Monday evening. The deal could backfire though if Yahoo's effort to make more money alienates a Tumblr user base that so far has been subjected to hardly any advertising during the service's six-year history.
Mayer is betting that Tumblr will provide Yahoo with a captivating hook to reel in more traffic and advertisers on smartphones and tablet computers. That rapidly growing market is expected to become even more important during the next decade as people increasingly consume digital content on mobile devices instead of laptop and desktop machines.
Besides offering one of the top mobile apps, Tumblr also runs one of the world's busiest websites, featuring 75 million daily posts about everything from politics to pets. Advertising has been a missing ingredient so far as Tumblr, like many online services in their early stages, focused on building a loyal audience before turning its attention to making money.
Tumblr will remain based in New York and led by Karp, 26, who may now have a mentor in Mayer, 37. The startup has about 175 employees.
The deal also has some symbolic significance for Yahoo, an 18-year-old company that had spent much of the past decade aimlessly drifting under different management teams while Google overtook it in terms of size and influence. At the same time, newcomers such as Facebook and Twitter began to command the attention of people who found themselves spending less and less time on Yahoo.
Part of Yahoo's problems stemmed from missed chances to improve its service and technology. It flirted with potential acquisitions of Google and Facebook in those two companies' early days, only to have the talks unravel because Yahoo was not prepared to pay asking prices that were far below the current market values of Google ($300 billion) and Facebook ($63 billion).
Yahoo also considered buying YouTube in 2006, only to be outbid by Google, which snapped up the world's leading online service for $1.76 billion - a price that now looks like a bargain.