
Why Yahoo! May Have to Write Off All the Goodwill from Its Huge Deal for Tumblr
Of the almost $3 billion that Marissa Mayer has spent on M&A at Yahoo! (YHOO) during her almost four-year tenure as CEO, the biggest deal to date was spending $1.1 billion on Tumblr in May 2013.
Mayer promised not to "screw it up" when she made the deal, concerned about Yahoo! destroying the culture of a smaller, faster-growing company.
While she didn't do anything overt to infect the Tumblr culture with the ill effects of a bigger company, Tumblr started dropping in popularity on the App Store almost immediately after the deal closed.
Mayer's hope was that she was buying a lot of traffic that would continue to grow for Yahoo! and that they could monetize. Ideally, this traffic would continue to be strong in the mobile world and not just the desktop world.
Unfortunately, both of those assumptions appear to have been incorrect. Tumblr had a significant "not suitable for work" problem which impeded monetization.
A year ago, Yahoo reorganized Tumblr sales under Yahoo's Chief Revenue Officer, Lisa Utzschneider, and promised Tumblr would do $100 million in revenues for 2015. A few weeks ago, during the last Yahoo earnings call, Mayer had to admit that this goal was not achieved. Shortly thereafter, news came out of Yahoo that Tumblr sales would go back to being run on its own instead of by Utzschneider.
Yahoo announced in Q4 that they would write off $230 million of the $750 million in goodwill they paid when they acquired Tumblr in 2013 for $1.1 billion. In yesterday's 10-k filing, Yahoo hinted that they could soon write off all the remaining goodwill soon.
Why do this?
In short, it's yet another signal that Yahoo is dressing itself up for a potential sale this year. A buyer of Yahoo's core business would rather take over a business that is properly cleaned up for a sale. That means writing off or writing down excessive goodwill which a company has been carrying on its books for years.
Yahoo wrote down $4.5 billion in goodwill in its fourth quarter (which included the $230 million for Tumblr). The language in the recent 10-k suggests that more is coming.
Why not have just written all the goodwill off in Q4, instead of a multi-stage process? Because, in writing down the full goodwill in Tumblr, Yahoo would be basically conceding that this acquisition, a core element of Mayer's overall strategy, was a total failure. That's tough for a sitting CEO to do, at least all in one shot.
But if that's what it takes to sell the core business for a decent price, Yahoo's board and lawyers prepping the 10K just admitted they're willing to accept the embarrassment that comes with it.
This article is commentary by an independent contributor. At the time of publication, the author held a long position in Yahoo!
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