Is Yelp Yahoo's Potential M&A Target?

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Yelp, Inc. ( YELP ) operates a social networking website that allows users to rate and review different places. The company's journey so far has been inconsistent. Even though Yelp has managed a steady rise in its revenue, the costs of its operations have also risen significantly, and this has weakened its overall financial performance. However, there have been talks of a possible merger between Yahoo and Yelp that could help Yelp get on the track to profitability.

Yelp as Yahoo's Potential M&A Target

One of the factors that could assist Yelp in stabilizing is a significant strategic change. Such a change can come from the company's merger with or acquisition by a bigger entity. The recent trend suggests that Yelp is a potential M&A target for Yahoo Inc. ( YHOO ). Since the appointment of Merissa Mayer as Yahoo's CEO, Yahoo has been going through some extensive strategic changes, and one of the changes is an increase in M&A activity.

While discussing Yahoo's earnings for fourth quarter 2012, Mayer said, "The combination of more personalized content and increased product innovation will be key in getting us back to a path for display revenue growth." She also pointed towards the fact that the company intends to make developments in the path of personal content, and some analysts infer that Yelp provides the services that Yahoo is seeking.

Other reasons why Yelp could be the perfect M&A target for Yahoo is the fact that Yelp has continuously reported a significant increase in revenue year over year. Yelp's revenue increased by 65% to $41.2 million in fourth quarter 2012, compared to the same quarter last year. The company also expects a significant rise in revenue for the same period in 2012.

Another factor that could encourage Yahoo to acquire or merge with Yelp is the competing nature of operations. Yelp's service directly competes with Yahoo's similar service called Yahoo Local. By acquiring Yelp, Yahoo could strengthen Yelp's services and endorse both websites at the same time.

Since the appointment of the new CEO, Yahoo has made some extensive changes that have had a positive impact on the company's financial and market performance. For fourth quarter 2012, Yahoo's profit margin was 9.27%; on the other hand, Yelp reported a loss margin of -12.92%.

Another company that provides a similar service as Yelp is Dex One Corporation ( DEXO ). Dex is not a feasible target for Yahoo because of its small size and a slight contradiction with the nature of the business. The services of Dex and Yelp are very similar; however, they both have reversed roles. Where Yelp promotes business through customer reviews, Dex introduces businesses to customers through various marketing solutions. For fourth quarter 2012, Dex reported a loss margin of -3.96%.

Yelp's Market Performance

The market performance of Yelp has been extremely volatile in past months. There have been several high and low trends for the company's share price. Currently, the shares are being traded within the range of $24.88 and $25.40; however, the 52-week range of the share price of the company has been between $14.10 and $31.96. The difference between the two extremes and the current share price suggests that market performance has fluctuated vigorously in the past 52 weeks. The following chart represents the trends of the company's share price over the past year.


The chart shows that the share price has fallen and risen steeply multiple times over the past year. Comparative stability can be observed towards the end, but considering the past trend, trusting this stability may not be wise.

After analysis of the relevant factors, in my opinion, investors should hold their investments in Yelp. I believe that the market performance of the company is highly volatile, and buying the shares at this point will be risky. Yelp will be a good investment to buy if the rumors regarding its merger with Yahoo turn out to be true. Otherwise, Yelp will remain a risky investment in the foreseeable future.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing

Referenced Stocks: DEXO , YELP , YHOO

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