The Wall Street rumor mill has been working overtime during the past month. Just a week after shares of Salesforce (CRM) popped double-digits following a report that the company was preparing to sell itself for $55 billion, shares of Yelp (YELP) jumped nearly 30% for the same reason.
Yelp, founded in 2004 by former PayPal executives, was exceptionally successful leading up to its 2012 IPO. By bringing “word-of-mouth” reporting to the Internet, Yelp connected consumers with local businesses via searches, advertising, and reviews. Yelp was also one of the first Internet companies to develop a successful mobile platform. In 2009, Yelp was so prosperous that Google (GOOGL) offered to buy it for $550 million.
In retrospect, Yelp’s executives were right to turn it down as the company now has a market capitalization of more than $3.5 billion. However, Yelp has consistently struggled to generate profits; in fact, 2010 was Yelp’s only profitable year. Not surprisingly, investors are finally losing faith in management. Decreasing unique visits to the site, in addition to local businesses denying advertising renewals, has overshadowed growing revenues. Above all, Yelp has failed to capitalize from increased mobile traffic. Now, with its stock price hovering at half of its 52-week high, Yelp is looking for help.
As was the case with Salesforce and Microsoft (MSFT), a number of rumored buyers have emerged, the most obvious of which is Google. With more than $64 billion in cash reserves, Google clearly has the means to acquire Yelp. However, Google may no longer be interested in the online review platform service. After already having offered to buy Yelp in 2009, Google’s executives may not want to renegotiate with Yelp’s executives, especially if they are commanding a premium to Yelp’s $3.5 billion valuation. Moreover, Google has already entered the online business review market through its 2011 acquisition of restaurant reviewer Zagat. As such, Google may very well take advantage of Yelp’s struggles by investing more in Zagat, as opposed to acquiring Yelp.
Next on the list of potential suitors is Yahoo (YHOO). Unlike Google, Yahoo does not currently own an online review platform. Thus, Yahoo could definitely benefit by purchasing Yelp to expand its Internet influence; however, in all honesty, Yahoo does not have the funds to do so. Yahoo currently holds roughly more than $5 billion in cash reserves. Considering Yelp’s current market capitalization of $3.5 billion, the acquisition may be too expensive for Yahoo, especially now that shareholders are demanding Marissa Mayer end her acquisition binge.
Therefore, we are left with Alibaba (BABA) and Priceline (PCLN) as the most intriguing, and realistic, options. In terms of financial viability, Alibaba is more likely to acquire Yelp; with more than $20 billion in cash, compared to Priceline’s $4.6 billion, Alibaba could easily add Yelp to its company portfolio – which includes Snapchat, Lyft, Kabam, Tango, and Weibo (WB). Yelp could help Alibaba penetrate smaller U.S. businesses, a market in which it has little exposure. For Priceline, Yelp would provide an interesting addition to its portfolio of travel services, including PriceMatch, OpenTable, Booking.com, and Kayak. Not only would Yelp’s massive database of reviews help Priceline detail travel packages, but Yelp could also generate advertising revenues from local hotels and businesses.
Although there is no guarantee that Yelp will sell itself, rumors provide investors with important insight into the nature of Internet companies. Yelp’s struggles exemplify the “survival-of-the-fittest” mindset of the tech industry, as a chain of failures can quickly dissolve a company’s market share.