Yahoo! Inc. (YHOO): Can It Eventually Rival Facebook Inc (FB)?

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Yahoo! Inc. (NASDAQ:YHOO) has been on a major shopping spree this year. Since taking the helm at Yahoo!, CEO Marissa Mayer has been absorbing smaller mobile app producing businesses, such as Astrid, Jybe, Propeld, Stamped, OnTheAir, and Summly. Astrid is a to-do list, Jybe, Propeld and Stamped are social recommendations apps, while and Summly are focused on news sharing and summarization.

Yet with $3.0 billion in cash, Yahoo! Inc. (NASDAQ:YHOO) has been reportedly looking for the elusive game-changing acquisition that would help it catch up to

Yahoo! Inc. (NASDAQ:YHOO)

Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB). Yahoo! recently attempted to acquire video-sharing site Dailymotion, but the deal was ultimately blocked by the French government. Yahoo! was also rumored to be considering larger targets such as Hulu, Zynga Inc (NASDAQ:ZNGA) and Pinterest. On May 16, however, news broke that Yahoo! Inc. (NASDAQ:YHOO) was in talks to acquire microblogging and social networking website Tumblr. Tumblr, which allows its users to search for and follow multiple blogs, had 117 million unique visitors in April, according to comScore. Tumblr claims that it has 107.8 million blogs, which have generated over 50.6 billion posts to date. Several rounds of funding since 2007 value the privately-held company at $800 million, which means a deal with Yahoo! Inc. (NASDAQ:YHOO) could come in at $1 billion or more. Would acquiring Tumblr put Yahoo! back on the map again, or could it become a liability? Let’s examine the benefits of this deal for both parties.

What the deal means for Yahoo!
I think it’s clear that Mayer, one the chief architects of
Google Inc (NASDAQ:GOOG)’s ecosystem, believes that Yahoo! continues to trail Google due to its lack of several major components that modern Internet users are dependent on. For example, Mayer realized that mobile users were increasingly dependent on social recommendation services, such as Yelp Inc (NYSE:YELP) and OpenTable Inc (NASDAQ:OPEN), so she addressed that need by acquiring several recommendations apps. She also realized that Yahoo’s own video site lacked the social aspect of YouTube, which she attempted to solve with the Dailymotion bid.

Mayer also realizes that Yahoo! Inc. (NASDAQ:YHOO) has no viable social platform to compete against Google+ or Facebook. That’s where New York-based Tumblr could help turn the tide, since it has a self-sustaining user base to continuously generate and share content. More importantly, Tumblr would boost Yahoo’s display advertising revenue, which declined 11% year-on-year last quarter.

In addition, Yahoo! already owns photo-sharing site Flickr, which has a user base of over 50 million. Flickr’s recent iOS redesign caused photo uploads and viewership to spike 25%. Therefore, just as Google Inc (NASDAQ:GOOG) turned Picasa into its image sharing platform, Yahoo! can do the same by merging Tumblr and Flickr into a single, seamless photo-blogging platform.

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