Source: Zillow

Critics of real estate portals Zillow (NASDAQ:ZG) and Trulia (UNKNOWN:TRLA.DL) have long thought both companies represented poor business models, and the $3.5 billion all-stock merger of the two isn't about to change anyone's mind. Although there's been a lot of ink spilled about the benefits to accrue from combining the two real estate info houses, this may end up being less a fortuitous joining of forces and more like the merger of declining retailers Sears, Roebuck and Kmart that resulted in Sears Holding, which is still a sickly business today.

The obvious advantages of the Zillow/Trulia combination include the supposed synergies the deal will impart, including the ability to increase Web traffic that will leverage the companies' marketing power and ability to raise advertising dollars. Certainly there's sense to joining these two similar businesses together, as one (Zillow) tends to focus on home sellers while the other (Trulia) on buyers. Getting the jump on the growth by being one entity instead of two competing firms should affirm their one-stop-shop business model on real estate listings, design, and financing.

Yet like the ill-advised merger that brought together Sears and Kmart, the creation of Zulia (or is it Trillow?) may be less than what it seems.

It's true both companies have enjoyed soaring revenues as they expanded their markets, and Trulia is expected to see a 76% surge this year while Zillow could enjoy a lesser though still robust 54% rise in 2014. But there seems to be a ceiling they will reach long before they become a threat to the real estate market. And once growth peaks, the valuation of the combined company will come crashing down. It's something that could happen sooner, rather than later.

Source: Trulia

Zillow reported last quarter it had almost 53,000 real estate agents as premier subscribers to its service, a 56% year-over-year jump, and Trulia had 66,700 agents, up 139% from the year-ago period. The similarity in the agent base suggests there's significant overlap because there's only a small subset of the total 5 million-agent pool who see the value in advertising on a site, and find it necessary to do so across multiple platforms.

Although Zillow maintains it will keep the brands separate, once they're joined there's little sense in actually doing so as they're otherwise very similar experiences with slight differences. Homeowners, for example, like to check Zillow's Zestimate of their home's value while Trulia offers options for buyers, sellers, and renters, too. Bringing all of their specialized functions under one roof will make it a seamless experience for those in the market to buy or sell. If that were to happen, advertisers will be able to consolidate their own marketing budgets into one channel, resulting in decreased revenues for the new company.

Nor does the combination provide any incentive for new agents to sign up. Out of the vast universe of agents working in the industry, both companies have managed to attract only an incredibly small percentage to sign up with them. The bulls may see a growth market ahead, but the flip side is that agents may understand they get free listings anyway on the site. Forbes recently pointed to a Harvard Business Review publication that said Zillow includes a home listing for free and names the Realtor marketing the property, suggesting, as the old saying goes, why buy the cow when you can get the milk for free?

Agents remain the straw that stirs the drink. Zillow and Trulia are nothing without the network of Realtors who assist in the completion of most transactions. Moreover, the National Association of Realtors has its own site,, and plenty of others from Move and Realogy to Redfin and Homerun are in the game or just entering the field, attacking the space from different angles. The merger of Zillow and Trulia is one of necessity, not convenience.

Source: Zillow  SEC filings.

Source: Trulia SEC filings.

As the charts above show, the gap between revenue and losses attributable to shareholders is widening at an alarming rate, and is accelerating as time progresses. Combining these two companies can only exacerbate this distortion as Trillow or Zulia will still need to rely upon the real estate agents themselves. With so much change taking place in the industry, one that's never truly recovered from the meltdown of the financial markets, there's no guarantee they'll be able to justify the valuation investors have accorded them. 

Just as Sears ultimately proved joining two bad businesses doesn't make one good one, it will be only after the merger of Zillow and Trulia is complete that investors will see the critics were correct that the lights were on at the real estate portals, but no one was home.