This is hardly worth a note, so we'll keep it short. The market is driving YELP up 12% on the OPEN acquisition. YELP isn't a viable acquisition target; there are two simple reasons why.
KEY POINTS
- YELP IS NOT OPEN: YELP's business model is predicated on driving new account growth in excess of the absurd attrition it experiences on an annual basis; it does so through aggressive salesforce expansion (there is no leverage in the model). YELP trades at almost 3x OPEN's market cap, so there aren't that many potential acquirers that can afford to pay a premium on top of YELP's bloated $4.7 billion market cap. OPEN on the otherhand, has a corner on the Electronic Reservation Book (ERB) Market with 99% customer retention, and found a buyer who operates the same model in a different industry.
- BANKER SUICIDE: Remember that in any M&A deal, the advisors to the potential acquirer will get an in depth look at YELP's financials. That means a detailed look at YELP's customer profile, including who they are, and how long they have been doing business with the company. Management can dodge our collective questions all they want on its customer retention issues, but it will not have that luxury if its in discussions to be acquired. If a banker and/or advisor somehow successfully pitches YELP to an acquirer (by not disclosing its attrition issues), that will likely be the last deal they do together. Given there are only so many companies that could afford to do a deal of this size, that would be one very large M&A client to lose.
If you have any questions, or would like to discuss in more detail, let us know.
Hesham Shaaban, CFA
@HedgeyeInternet