Yahoo's recent acquisition of Tumblr has been viewed by many as an acqui-hire of Tumblr's founder David Karp. However, for some analysts, the acquisition is a $1.1 billion mistake. And while we haven't done an analysis of the acquisition ourselves, we really hate it when others make glaring mistakes in their analysis. In the article, the author states:
"The WACC of 9.8% feels high. If we instead use the risk-free rate of 4.5%, then the U.S.-only RPM hurdle rate drops to $0.81, the international-included RPM hurdle rate drops to $0.41."
We have several really big problems with this statement. A WACC of 9.8 percent seems fairly reasonable for a blog hosting company that derives its revenue from advertising. We estimated GE's WACC at www.thatswacc.com and were given a WACC of 7.12 percent. Given that Tumblr is riskier than GE, we would argue that if anything, 9.8 percent could even be a little low. If that weren't bad enough, the author decides to use the risk-free rate in place of WACC, which is the same as saying that the acquisition of Tumblr is risk-free! Finally, the author uses a 4.5 percent risk-free rate. Given that the 30-year Treasury bond currently yields about 3.3 percent, we would love to get a 4.5 percent risk-free rate.
