Yahoo Inc. said it is acquiring blogging service Tumblr for $1.1 billion cash, a bold bet by Chief Executive Marissa Mayer to revitalize the struggling Internet pioneer by co-opting a Web property with strong visitor traffic but little revenue.
The deal, which will use about a fifth of Yahoo's $5.4 billion in cash and marketable securities, is the largest by far since Mayer took the reins in July seeking to reverse a multi-year decline in Yahoo's business and Web traffic.
"Per the agreement and our promise not to screw it up, Tumblr will be independently operated as a separate business," Yahoo said in a statement on Monday.
Tumblr is one of the Web's most popular hubs of so-called user-generated content. The deal will provide Yahoo with a much-needed platform in social media to reach a younger generation of users less tied to Yahoo's traditional Web portal and email services.
Analysts, contacted after the deal was reported on Sunday by the online publication All Things D, said Yahoo was paying a hefty premium. Media reports have pegged Tumblr's 2012 revenue at $13 million. The privately held company, based in Manhattan, does not disclose its financial results.
"Even if revenue was $100 million, it means Yahoo paid 10 times revenue," said BGC Financial analyst Colin Gillis. "Ten times is what you pay to date the belle of the ball. It's on the outer bands of M&A."
Yahoo could quickly boost Tumblr's revenue by combining the website with its own sales force, said Pivotal Research Group analyst Brian Wieser. But loading Tumblr up with banner ads risks alienating its users and probably wouldn't provide a significant lift to Yahoo's overall revenue, he said.
"It's not clear that this deal will be favorable from a return-on-capital perspective," Wieser said. "One billion (dollars) for one company is a big bet."
Shares of Yahoo fell 1.4 percent in premarket trade. They closed on Friday at $26.52.
Yahoo remains one of the Web's most popular destinations, with hundreds of millions of monthly users, but the company has seen its revenue shrink in recent years as consumers and advertisers favor rivals such as Google Inc. and Facebook Inc.
Yahoo said the acquisition is expected to increase its audience by 50 percent to more than a billion monthly visitors.
David Karp, who founded Tumblr in 2007, will remain CEO.
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