If not quite a merger of equals, the recently announced buyout of Trulia (NYSE: TRLA) by Zillow (Z 4.77%) is a fusing of two firms with matching business profiles. Both are online real estate marketplaces featuring a host of properties for rent or sale, and both make the bulk of their money from the brokers pushing some of those homes.
The synergistic effects of a tie-up are obvious, and it's clear why Trulia is ponying up for the purchase. Let's take a look at a few key features of the deal, and see how and if shareholders will benefit.
Cashless transaction
Zillow won't have to part with any dollar bills for the deal. It's spending around $3.5 billion worth of its stock to acquire Trulia. The latter's shareholders will receive 0.444 shares of Zillow for every Trulia share they hold, while Zillow stockholders are to receive one comparable share of the combined company.
After all that stock changes hands, Zillow estimates that its current shareholders will own around two-thirds of the new entity, with today's Trulians taking the remainder.
At $3.5 billion, Zillow is paying approximately 13 times the average analyst estimate for Trulia's fiscal 2014 revenue, and 10 times anticipated 2015 top line. There's no equivalent for bottom line, as (like its would-be owner, of late) Trulia is unprofitable.
The peak of the market
Zillow, which apparently had Trulia in its sights as far back as 2006, picked an ideal time to strike a deal fueled by stock. Its shares hit an all-time high of just over $160 apiece on the day the acquisition was announced.
But that wasn't the only peak in the neighborhood. It just so happened that Trulia's stock had also scaled its historical summit, touching $65 the same day.
After the deal was announced, however, those lofty stock prices fell earthward. These days Zillow can be had for around $139 per share, while Trulia hovers around $59. This despite strong, estimate-beating Q2s reported by both companies in the wake of the deal's announcement.
So current investors, it seems, aren't convinced by talk of a bright, shared future for the two companies. Perhaps that has something to do with the fact that ...
The two brands will remain separate
In a brief letter to "certain industry partners" filed with the Securities and Exchange Commission by Zillow, the company promises to keep both it and Trulia's brands alive.
This, Zillow claims, is because the two "have large and loyal consumer followings with limited overlap."
That may be the case, but zooming out a bit it's apparent that many of those followers are free riders. According to Zillow's data, Zillow and Trulia's combined revenue accounts for less than 4% of the roughly $12 billion real estate professionals spend annually on marketing their properties to potential buyers.
Zillow/Trulia hopes to raise that number by spreading its message wider. In the letter, Zillow said the combined entity will "allow for better coordination among our brands when it comes to listing information." It can bring Trulia listings to the popular online destinations like Yahoo! Homes, AOL Real Estate, and Microsoft offshoot MSN Real Estate that it currently utilizes.
The Foolish takeaway
The marriage of Zillow and Trulia is akin to hearing that two friends with similar personalities, interests, and habits have decided to wed. It's understandable that the two would want to coexist and operate under the same roof.
However, neither firm has yet proven that it can turn a profit, and they operate in a business stuffed with a host of competing sites -- Redfin, for one, is a brokerage site that enjoys plenty of traffic, while Realogy's (RLGY +0.00%) recently acquired ZipRealty also features plenty of properties for those shopping for a home.
So although the acquisition is a logical move, it's not necessarily a beneficial one. Real estate is a tough segment to succeed in, no matter how compatible and determined a partnership might be.
