- Angie’s List recently rejected IAC’s acquisition offer for a cash-only deal.
- IAC tries to increase its market share in reviews market by adding another player to its HomeAdvisor brand.
- For that purpose, Yelp could be a good fit just as Angie’s List would have been.
Media and Internet holding company IAC (NASDAQ:IACI) completed another successful spin-off when Match Group Inc (NASDAQ:MTCH) went public two weeks ago. IAC’s chairman Barry Diller's business strategy is to acquire small and promising companies to maximize their potential while gaining market share, and then once they reach their peak, they are either sold or spun-off as newly traded public companies. That was the case with Priceline (NASDAQ:PCLN), Expedia (NASDAQ:EXPE), TicketMaster, LendingTree Inc (NASDAQ:TREE), HSN (NASDAQ:HSNI), and Match Group. Now, the holding company is eyeing the crowd-sourced reviews market.
There are two main companies controlling most of the market with different business models. The first one is Angie's List (NASDAQ:ANGI), which is a paid subscription platform of crowd-sourced reviews of local businesses in the U.S., Vancouver, and Toronto. Angie’s List is a $630M company with an annual revenue of around $350M that has been for sale for a long period of time. The second review market leader is Yelp (NYSE:YELP), which offers local business reviews worldwide, online reservation services, and online food delivery service. Yelp is a $2.4B company with $550M of annual revenues, and they have already turned down some acquisition offers.
As the crowd-sourced review market is rising, social networks like Angie’s List and Yelp are popular acquisition targets by the Internet and social services companies. Most recently, Angie’s List rejected IAC’s offer to acquire the company for a share price of $8.75 in cash, which represented a 10% premium above the stock price. At first, it seemed odd that Angie’s List rejected the offer after the company had looked for a buyer for a long period; however, from the shareholder perspective, it was worth their while as the stock price has hiked around 30% since the offer was received and rejected, as shown in the chart below.
IAC offered Angie’s List a cash-only deal, which provided Angie’s List’s shareholders a maximum 10% premium and no access to the future upside of the acquired company, a benefit they receive in cash and stocks deals. As presented in an earlier article, IAC has a history of adding incredible value to companies before they unleash them and set them free, either through a buyout or an IPO. Angie’s List’s shareholders are probably right and their long-term upside in a cash and stocks deal will be significantly higher; however, when they rejected the deal hoping to receive improved terms from IAC, they might just have redirected the company towards Yelp.
Yelp already rejected takeover offers from Google and Yahoo, and it will be difficult for their management to justify another rejection if they receive a decent offer from IAC. Moreover, IAC is not buying companies to demolish their brand, split them or only use their IPs. IAC is a true value creator, and from previous experience, it could assist Yelp greatly to increase sales and gain a larger share of the market.
IAC has its own crowd-sourced review service, HomeAdvisor, that is perceived to be a smaller player in the reviews market. Judging by previous IAC acquisitions, the company wants to increase its market share in this particular market, and for that cause, it can acquire either Yelp or Angie’s List and merge them into HomeAdvisor (or keeping both brands alive as it did in the dating business). For this purpose, Angie’s List rejection accelerated IAC’s interest in Yelp, and I believe we will see an official offer made soon to Yelp.
I estimate this move in 70%, and I think investing through options, in this case, will mitigate the risk-return balance of such a speculative investment.