Amusingly, some tumblr users are organizing petitions against the buyout, knowing that Yahoo will ruin tumblr.
[In case the image link breaks, the text is: "Yahoo is about to buy tumblr! They also bought summly.com (and closed it), astrid.com (and closed it), delicious.com (and almost closed it), and flickr.com (and deserted it)."]
Why is this a boneheaded decision by Yahoo? First, tumblr has no “moat”. When Yahoo ruins tumblr, there’s nothing preventing people from going to another website. If tumblr users are already petitioning against the buyout, you can be pretty sure they aren’t sticking around once the deal closes.
Second, tumblr doesn’t have revenue. Even if you start putting ads on tumblr pages, that won’t be enough to offset the cost of running it. Plus, if Yahoo forces ads on users, they’re more likely to leave.
Why do such a stupid deal? It enables Yahoo’s management to seem brilliant. “Hooray for us! We paid $1B for tumblr, but it’s worth even more than that! Stock options and bonuses for all of us!”
Such purchases are indirectly financed by the State. Nominal interest rates are 0%, real interest rates are negative 10%-30% or less, and Yahoo is a large established corporation. As a large established corporation, Yahoo gets cheaper access to capital than other businesses, making it easier for them to exploit negative interest rates. With negative real interest rates, a stupid purchase can turn out to be profitable. For example, if Yahoo paid $1B for something that’s only worth $500M, a couple of years of financing at a -20% interest rate turns that into a profitable investment.