There's nothing like a buyout rumor to goose the price of a stock, and so it was late last week with online business review aggregator Yelp (NYSE:YELP).
The company's share price is up by almost 30% after The Wall Street Journal, citing "people familiar with the matter," said Yelp is consulting with investment bankers and soliciting possible buyers for a sale.
Yelp needs help?
As with many fast-burning young Internet companies, Yelp has spilled a lot of red ink. Since 2010, it's posted but a single annual net profit, and much of that gain was due to an income tax allowance.
Revenues have been rising at a brisk pace, but growth is slowing in key metrics such as the site's number of unique visitors.
Investors seemed to be losing interest. Before those buyout rumors started to swirl, Yelp stock was trading at less than half of its one-year high of almost $87.
The local business segment provides a huge potential revenue base. The trick is to turn that into actual advertising dollars, and with the resources it has at the moment, it seems Yelp is finding that a challenge to do profitably. It might just be better off in the portfolio of a deep-pocketed company that can absorb a few more years of losses if necessary.
Let the bidding begin
And who might that be? Several observers have suggested Google (NASDAQ:GOOG). This is an obvious top pick, as the acquisitive search giant offered to purchase the company for around $550 million back in Yelp's pre-IPO days of 2009.
A half decade is a long stretch in Internet time, and Google has since moved on, opening its wallet to buy storied restaurant review specialist Zagat in 2011.
Google certainly has the capital to spend on Yelp, but it's a question of whether supplementing or replacing Zagat would be worth that money. Also, there's bad blood between the two companies, with Yelp accusing Google of manipulating search results to favor Zagat over itself.
Yahoo! (NASDAQ:YHOO) is another top Internet name getting banded about as a potential buyer. This makes a bit more sense to me, as like Google, it is fond of acquisitions, and unlike Google, it doesn't have a solid, branded asset in the business review sphere.
The big problem is that Yahoo! has only $5 billion or so in cash and short-term investments, and it's committed to spending a chunk of that on share buybacks. Yelp probably isn't productive enough of an asset for the company to justify the expense of buying it.
Amazon.com (NASDAQ:AMZN) has a much bigger pile of cash, clearly loves the idea of operating every type of business or service known to man, and has already waded into several niches of the food service segment that dominates Yelp's reviews.
Like Yahoo!, an Amazon.com buyout would make a certain amount of sense... although the big e-retailer seems to be more interested in direct sales of merchandise at the moment rather than the local business advertising model presented by Yelp.
Facebook (NASDAQ:FB) is perhaps the most suitable player in our fantasy acquisition game. It's got the moolah, and as we've seen with its bigger-ticket acquisitions like Instagram, it's happy to spend this on name assets. Yelp might be a challenge to integrate with Facebook's core offerings, however.
Take a number
There's no shortage of well-known companies being uttered as possible Yelp owners, including a few dark horses. Apple has gotten more than a few mentions, as has Priceline Group, TripAdvisor, and GrubHub.
Yelp won't be a bargain; after the WSJ's story fueled the stock price jump, its market capitalization stood at $3.7 billion. But if the article is accurate and the company's eagerly waving the "For Sale" sign -- "buy us, PLEASE!" -- it's questionable whether it can command much of a premium above that level.
This isn't to say the company doesn't have value. In spite of its struggles, Yelp is a recognized brand that's often the first -- or only -- go-to option for consumers researching a business. That might be the factor that attracts a buyer -- perhaps one that's even willing to pay a little extra.
Eric Volkman owns shares of Facebook. The Motley Fool recommends Amazon.com, Apple, Facebook, Google (A shares), Google (C shares), Priceline Group, TripAdvisor, and Yahoo!. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Google (A shares), Google (C shares), Priceline Group, TripAdvisor, and Yahoo!.
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