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Rumor has it that Internet giant Yahoo! Inc. (YHOO - Analyst Report) will acquire the blogging and social networking site, Tumblr, for $1.1 billion in cash. The boards of both companies have approved the takeover, which has the potential to catapult Yahoo into the micro-blogging/social networking space.

New York–based Tumblr was founded by David Karp and Marco Arment in 2007. It is a micro blogging platform and includes some social networking features. It allows users to post blogs, photos and videos and also follow blogs posted by others. Tumblr has been successful at bridging the gap between blogging and social media. The website hosts 108 million blogs with 50.9 billion posts, having grown at a phenomenal rate over the last two years. According to ComScore, Tumblr had 117 million unique visitors in Mar 2013.

Yahoo’s social networking peers are  Google and Facebook (FB - Analyst Report), both of which are considerably well entrenched. In contrast, Tumblr managed just $13 million in advertising revenues in 2012. However, Mayer, the new CEO, has taken a very focused approach to breathing new life into the company and her decision to acquire the struggling provider of popular services makes perfect sense. Whether the valuation is justified or not is another story and will become clearer moving forward.

Yahoo! has been snapping up many small players (including startups), which are intended to strengthen its position in the mobile segment. The addition of Tumblr is the biggest since Mayer took control and brings a younger population of users, which the company badly needed to ensure continued growth.

With its detriorating position in the display advertising market and challenges in search due to competition from Google and Microsoft (MSFT - Analyst Report), Yahoo! needs to act fast and focused, which is exactly what Mayer is doing.

Yahoo has a Zacks Rank #2 (Buy).

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