Yahoo! Inc. (YHOO) is buying blogging network Tumblr Inc. for about $1.1 billion as Chief Executive Officer Marissa Mayer seeks to lure users and advertisers with her priciest acquisition to date.

Tumblr, headquartered in New York, will continue to host its more than 108 million blogs, while CEO and founder David Karp, 26, will remain in charge of the website, “per the agreement and our promise not to screw it up,” Sunnyvale, California-based Yahoo said today in a statement.

Mayer, CEO of the biggest U.S. Web portal since July, is betting that Tumblr will help transform Yahoo into a hip destination in the era of social networking as she challengesGoogle Inc. (GOOG) and Facebook Inc (FB). in the $17.7 billion display ad market. The price she’s paying -- about a fifth of Yahoo’s $5.4 billion in cash -- underscores the deal’s importance to Mayer’s turnaround effort, according to Zachary Reiss-Davis, an analyst at Forrester Research Inc.

“It’s an aggressive move,” Reiss-Davis said in an interview. “They are saying, ‘where is our next group of people who are going to spend many hours per week on Yahoo properties?’ It’s big bet that the answer is going to be Tumblr users.”

Yahoo’s shares declined as much as 2 percent to $26 in early trading. The stock had advanced 33 percent this year through May 17, compared with a 17 percent gain for the Standard & Poor’s 500 Index.

Adding Visitors

Adding Tumblr is expected to expand Yahoo’s audience by 50 percent to more than 1 billion monthly visitors, and increase traffic by about 20 percent, according to the statement. The transaction is expected to close in the second half of 2013.

“Our roadmap isn’t changing,” Karp said in the statement. “Our mission -- to empower creators to make their best work and get it in front of the audience they deserve -- certainly isn’t changing.”

Founded by Karp in 2007, Tumblr grew to log more than 13 billion global page views in the past month. The site offers a free service for publishing blogs on the Web and mobile devices, and tools for sharing photos and other content across social networks.

While Tumblr recently began letting advertisers pay for prominent placement and has said it expects to become profitable this year, Karp has resisted covering webpages with promotions to avoid alienating Tumblr’s younger audience.

Blog Network

The deal will make a multimillionaire out of Karp, who founded the company using money and experience he had acquired as a software consultant for the website UrbanBaby. Prior to that role, Karp interned at online-video creator Frederator Studios and worked as a salesperson at a Tekserve store in New York, according to his profile on LinkedIn Corp.’s site.

Karp grew up on Manhattan’s Upper West Side and dropped out of high school before moving by himself to Tokyo when he was 17. He founded Tumblr after returning to New York and still hasn’t earned his high-school diploma. The company’s headquarters, located in New York’s startup-friendly Flatiron District, is adorned with eclectic artwork.

Yahoo, which makes almost all of its revenue from online promotions, will inherit the challenge of making money from a site while trying to preserve its cool factor, Reiss-Davis said.

“They have to balance keeping those users actively using Tumblr, while at the same time adding advertising and putting monetization around it,” he said. “Those are very difficult tasks to balance against each other.”

Tumblr’s Backers

Tumblr’s content may also pose the risk of turning off some of Yahoo’s advertisers. The site’s terms of service permit nudity and other controversial material, and at least one pornographic site ranks among the 20 most-popular Tumblr blogs, according to Quantcast Corp.

Among Tumblr’s backers, Union Square Ventures in New York and Boston-based Spark Capital are the biggest winners. The firms led Tumblr’s first two financings, a $775,000 round in 2007 and a $4.5 million round the next year.

Sequoia Capital joined as an investor in late 2010 as part of a $30 million funding round. Tumblr then raised $85 million the following year, with firms including Greylock Partners, Insight Venture Partners, and Draper Fisher Jurvetson’s Growth Fund joining the existing investors.

Yahoo’s acquisition of Tumblr also brings validation to the New York technology community, which has seen startup activity increase in recent years with the success of companies including Tumblr, Gilt Groupe Inc. and Etsy Inc., according Ben Lerer, CEO of Thrillist Media Group and managing director at Lerer Ventures.

New York

“This is a big, big win for New York,” Lerer said. “Everybody believes that there’s going to be a bunch of billion-dollar companies coming out of New York in the next few years, and this is the beginning.”

Yahoo’s purchase may help seed the next generation of New York startups, according to Howard Lerman, CEO of Yext, a business-listings website based in New York.

“It’s going to, first of all, give a billion dollars into the VCs and the people that work at Tumblr, and secondly it’s going to give the people at Tumblr the confidence to go out and try this themselves,” Lerman said.

Seeking Buyer

Tumblr had contacted bigger technology companies seeking to be bought, or form a partnership, prior to closing the deal with Yahoo, according to people with knowledge of the matter, who asked not to be identified because the overtures were private.

Mayer has purchased at least 11 companies in her 10 months as CEO, from mobile app makers Stamped Inc. and Jybe Inc. to Summly, the news-reading application created by teenager Nick D’Aloisio. Before Tumblr, most of her acquisitions have been small and focused on talent acquisitions -- small teams bought at low prices -- an approach she advocated during her first conference call with analysts last year.

Tumblr ranks among Yahoo’s largest acquisitions, which include the $5.7 billion purchase ofMark Cuban’s and a $3.6 billion deal for Web-hosting site Geocities in 1999.

Dealmaking at Yahoo is being led by Jacqueline Reses, a private-equity veteran who was promoted last month to the role of chief development officer to reflect her oversight of talent through acquisitions, partnerships and company culture. Reses told employees at a staff meeting in late February that Yahoo is working on two “significant” acquisitions, according to a report in technology blog AllThingsD.

Yahoo Deals

Yahoo’s plan to buy a stake in France Telecom SA’s video site Dailymotion stalled last month after a disagreement about the deal, according to the French government.

Mayer had little to show for her efforts to turn around the company as of last month, when Yahoo reported a drop in its main display-advertising business and issued a sales forecast for this quarter that may fall short of analysts’ estimates. Mayer’s push to revamp products such as Yahoo’s home page and e-mail have made little headway to reverse a decline in display, an area where Google (GOOG) and Facebook (FB) are gaining ground.

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