Bloomberg News

Tech Selloff Makes Yelp to OpenTable Cheaper Targets: Real M&A

May 12, 2014

For potential buyers from Google Inc. (GOOG:US) to Facebook Inc. (FB:US), takeover targets just got cheaper.

The Standard & Poor’s North American Technology Internet Index has slumped about 20 percent in two months on investor concern that valuations for the fast-growing companies had gotten too frothy. The slide has made frequently mentioned takeover possibilities such as restaurant review site Yelp Inc. (YELP:US) and reservation booker OpenTable Inc. (OPEN:US) more affordable, said Macquarie Group Ltd.

Google, Yahoo (YHOO:US)! Inc. or Facebook could go after Yelp to get a slice of the $75 billion in local advertising spending that’s moving away from traditional sources such as newspapers, B. Riley & Co. said. EBay Inc. could be another suitor for Yelp, according to MKM Partners LLC. Yahoo -- poised to get a more than $10 billion windfall when Alibaba Group Holding Ltd. goes public -- also could be interested in now-cheaper targets such as smartphone advertiser Millennial Media Inc. and Pandora Media Inc. (P:US), said CRT Capital Group LLC.

“Some deals that were just out of reach before may now happen,” Rob Sanderson, an analyst at Stamford, Connecticut-based MKM, said in a phone interview. “There’s sort of a new-guard/old-guard thing going on in the Internet sector and the new breed of companies is growing very, very fast. The old-guard companies, like EBay or Google or Yahoo, would like to get more exposure to these areas.”

Representatives for Yelp, OpenTable, Pandora, Yahoo, Facebook, Google and EBay -- all based in California -- declined to comment, as did a representative for Baltimore-based Millennial Media.

Buying Opportunity

Technology shares erased some gains from a rally in the Nasdaq Composite Index (CCMP) that drove valuations to about double that of the broader S&P 500 (SPX) benchmark in March. The Nasdaq has since fallen 6.6 percent from its March 5 high.

The decline has more to do with a shift in the way investors are assessing these high-growth stocks, and less to do with companies’ individual earnings power, Sanderson said.

“There’s always something on the margin here or there for each of these companies, but nothing fundamental that would change the opportunity or the outlook,” Sanderson said. This “is an exceptional buying opportunity” for shareholders.

The same may also be true for corporate acquirers, he said.

Yelp is down 45 percent from its 52-week high of $98.04. Last week, shares of the San Francisco-based company fell to 13.4 times its sales in the past year, the lowest multiple (YELP:US) since July.

‘Premium Property’

For interested buyers, which also may include Apple Inc. (AAPL:US), “it’s definitely easier to justify the price,” Blake Harper, a Baltimore-based analyst at Wunderlich Securities Inc., said in a phone interview. Yelp, which closed last week at $54.22, has a market value of $3.9 billion.

A representative for Apple declined to comment.

Buying Yelp would help larger technology providers gain a stronger presence in local advertising as about $75 billion in spending that had been earmarked for traditional platforms comes up for grabs over the next five years, said Sameet Sinha, a San Francisco-based analyst at B. Riley.

“Local advertising is a nut that nobody has been able to crack,” Sinha said in a phone interview. “But now I think there’s actually an imperative to crack that nut. And Yelp is a premium property there. It is well-known, well-regarded among most consumers.”

Mobile Push

Yelp’s restaurant and bar reviews are increasingly accessed through mobile devices, which may appeal to companies that are trying to stay ahead of a consumer shift to smartphones, said Tom White, a New York-based analyst at Macquarie. For EBay, Yelp offers the local business relationships and mobile-user base needed to draw more consumers to its pay-by-smartphone platform, said Sanderson of MKM.

Yelp (Y:US)’s revenue multiple is still more than double the median for U.S.-based Internet media and services companies valued at more than $1 billion, according to data compiled by Bloomberg. And any buyer may have to offer more than the company’s March high, at least an 81 percent premium, to get a deal done, said Kerry Rice of Needham & Co.

“I don’t think there’s any reason for them to have to sell the company,” the San Francisco-based analyst said in a phone interview. “Unless it’s a very attractive offer, I don’t think it would be consummated.”

For buyers looking for a cheaper option, OpenTable may be an enticing target, said White of Macquarie. With a price-sales multiple (OPEN:US) of 7.9, San Francisco-based OpenTable trades at about a more than 40 percent discount to Yelp, according to data compiled by Bloomberg. The company’s market value of $1.6 billion is less than half that of Yelp.

OpenTable Appeal

OpenTable “would be a good asset for anyone trying to build out a local or mobile ecosystem,” White said in a phone interview. It “checks a lot of the same boxes” as Yelp.

Analysts forecast (YELP:US) a 57 percent climb in Yelp’s revenue this year alone and a 19 percent rise at OpenTable, compared with a 13 percent slide in sales at Google and a 4 percent decline at Yahoo, according to estimates compiled by Bloomberg.

Beyond Yelp

Other acquisition candidates may include Pandora or Millennial Media, (MM:US) which have slumped 15 percent and 54 percent, respectively, so far this year, said Neil Doshi, a San Francisco-based analyst at CRT Capital.

Pandora is a leader in online radio and has been able to thwart most competitive threats so far, said Doshi, who sees the $4.6 billion company luring Google, Yahoo or Apple. Millennial Media, which sells advertising space on mobile devices, may appeal to Google or Yahoo as way to expand their reach in one of the fastest growing digital marketing areas, he said.

Shares of OpenTable rallied 3.5 percent to $69.66 today, while Millennial Media increased 1.8 percent to $3.44. Pandora rose 6 percent to $23.98 for the biggest gain in the Russell 1000 Consumer Discretionary Index. Yelp stock climbed 4.4 percent to $56.60.

Private companies also may become takeover targets, as the down market makes the prospect of an initial public offering less attractive, said Rice of Needham.

Arista Networks Inc., a provider of networking equipment and services, and Mobile Iron Inc., a mobile-software developer, are delaying their IPOs to wait for better market conditions, people with direct knowledge of the matter said last week. The decisions come after some technology company IPOs raised less money than expected. Weibo Corp., the Chinese microblogging service owned by Sina Corp., priced its April public offering at the low end of its marketed range.

Beats Headphones

Apple is in talks to buy Beats Electronics LLC, the closely held headphones maker and music streaming service co-founded by Dr. Dre, for $3.2 billion, people with knowledge of the matter said last week.

A deal may spur Amazon.com Inc. to acquire a rival streaming service, with Spotify potentially as a good fit, Jefferies Group LLC analysts led by Peter Misek wrote in a report last week.

A representative for Spotify declined to comment. Representatives for Seattle-based Amazon didn’t respond to a request for comment.

“Companies that have resources take the down side in the markets as opportunities to pick up assets on a relatively less expensive basis,” Rice of Needham said.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net Elizabeth Wollman


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