Yelp Is A Buy-Out Target. Who Are The Strategic Buyers?
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Increasingly popular online review site Yelp (NYSE: YELP) has a strong and growing brand name, and revenues are enjoying a decent growth of 63% year over year. With a strong group of regular users who visit the site especially when hungry, Yelp just might be a very attractive buyout candidate for a company that has a strong focus/interest on the local marketplace.
An appetite for restaurant reviews
Yelp has a lot of crowd-sourced content, with pictures, detailed reviews, and a growing presence on mobile. Almost 45% of Yelp's traffic comes from mobile alone, but mobile monetization hasn't taken off at all, and the company's not rolling out an operating profit.
However, Yelp is expanding its footprint in a number of new markets. The company bought Qype, Europe's largest local review site, in 2012 for approximately $50 million. This addition makes Yelp an attractive buyout candidate for a company that has an existing presence in its market, or which can realize a lot of synergies by acquiring Yelp, and thus gain a strong foothold in the large and expanding marketplace for local deals and advertisements.
For daily deals pioneer and category leader Groupon (NASDAQ: GRPN), acquiring Yelp makes abundant sense. Most reviews on Yelp are in the restaurants category, and Groupon has a lot of restaurant deals on its platform. It can fast-track Yelp deals by integrating them into Groupon's merchant network and existing infrastructure, while using its own payments platform. Groupon can also market the deals and goods from its own business on Yelp's platform, which would increase the offerings of both brands substantially. Groupon has a decent cash hoard of $1.2 billion and might also be interested in pursuing a stock-based acquisition as well.
Amazon (NASDAQ: AMZN)
Amazon already has a strong footing in the local-goods marketplace with its AmazonLocal business segment and its stake in LivingSocial. Amazon can integrate Yelp with its existing daily deal offerings to compete against the sector's current leader, Groupon. Groupon managed to sign up a lot of users due to the brute force of its marketing team, and it's increasingly standing alone in the daily deals space.
Amazon's visionary and eccentric CEO Jeff Bezos acquired competitors like Zappos to make sure Amazon's competitive advantage wouldn’t take a hit. And once he's made up his mind, he attacks market segments with full conviction. With more than $5.25 billion in the bank, and losses arising from AmazonLocal and LivingSocial, Bezos just might be convinced to buy a consumer-focused business like Yelp. However, Amazon management's attention seems to be focused on cloud computing services, fulfillment centers and selling more Kindles.
Moments after Yelp was mentioned in Facebook's (NASDAQ: FB) Graph Search launch, the market punished shares of Yelp big time, sending it down 7%. Facebook has more than 12.8 million small and local businesses on its platform, and it is monetizing this large group of merchants with promoted posts. Almost certainly, a large number of these businesses already have a strong presence on Yelp. Facebook can integrate the reviews of Yelp onto its platform, instead of getting the users to write reviews and upload information.
Acquiring Yelp would jumpstart Facebook’s Graph Search functionality, and make the review experience more social. In addition, Yelp is tactically building out its own social media platform, and Facebook would be effectively gobbling up a prospective competitor. Facebook has a cash hoard of almost $10.5 billion, which would easily allow such a buyout.
Google (NASDAQ: GOOG) wanted to acquire Yelp back in 2009 for a reported $500 million, but got shot down. After its failed conquest of Yelp, Google set out to build its own holistic platform called Google+ Local. The company acquired Zagat Survey and travel guide Frommer’s, and integrated them with Google Maps and Google+.
The Google+ Local platform can pose material threats to Yelp’s existence, since most of the traffic to both Qype and Yelp comes from Google’s search engine. Yelp might be tempted to sell itself to Google finally, and build a strong and dominant position in the local advertising market. Google's cash balance stood at $48.1 billion at the end of fiscal year 2012, and won't be impacted much by buying out Yelp, either.
The Bottom Line
Yelp has a lot of users for a consumer review business and a strong brand name. But the firm's inability to churn out an operating profit for a long time suggests that it operates in a very competitive landscape. With the entry of Facebook and other notable companies into the space, competition will heat up, and consolidation will likely take place.
Yelp's insiders control roughly 96% of voting rights, and have previously resisted offers from other companies. But with incremental competition, and the scrutiny of being a public company, Yelp's management just might take up a solid strategic offer to take the company to the next level.
ishfaque has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, and Google. The Motley Fool owns shares of Amazon.com, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!