Yahoo just admitted it badly overpaid for Tumblr

Actually, we got our math wrong.
Actually, we got our math wrong.
Image: AP Photo/Mark Lennihan
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Yahoo’s fourth quarter results are out, and lumped into them is a whopping $4.5 billion write down.

In the holiday quarter, Yahoo generated $1.27 billion in revenue, a 1.6% increase from the year-ago period, and recorded a $4.44 billion net loss. The Sunnyvale, California, company reported $4.4 billion in losses for the full year, meaning it would have turned a very modest profit for the year without the charge.

The culprit for these dismal results is a $4.46 billion goodwill impairment charge. Yahoo explains in a footnote:

We concluded that the carrying value of our U.S. & Canada, Europe, Latin America and Tumblr reporting units exceeded their respective estimated fair values. The goodwill impairment resulted from a combination of factors, including decreases in our market capitalization, projected operating results and estimated future cash flows.

In essence, Yahoo is admitting that these units have been hugely overvalued. In a call with investors, chief financial officer Ken Goldman revealed that Yahoo wrote down Tumblr by $230 million. The biggest charge is for its North American unit at $3.7 billion.

In 2013, CEO Marissa Mayer made headlines when she paid $1 billion to acquire Tumblr. Reporting on the news then, Quartz’s Zachary Seward explained how Yahoo arrived at the lofty valuation:

Valuing a fast-growing startup like Tumblr, which had little revenue when it was acquired, can be particularly difficult without a hefty helping of goodwill. The value of Tumblr’s tangible and intangible assets amounted to just $353 million, according to Yahoo’s accounting. Tumblr also had $114 million in liabilities.

Though the acquisition signaled to investors Yahoo’s embrace of hip, new technologies, that hasn’t translated to the bottom line. Last February, Marissa Mayer projected $100 million in Tumblr revenue for 2015, but Goldman said “the business did not deliver” on its revenue goal.