Should Investors Buy Into Groupon's Potential Yelp Acquisition?

Wall Street does not seem to be buying into Groupon’s (NASDAQ:GRPN) plan to acquire Yelp (NYSE:YELP) . Shares of the discount ecommerce company fell 4% Thursday, a day after news hit of their potential plan to buyout Yelp. Yelp popped over 5% after the news surfaced.

Groupon has struggled to succeed since going public; it’s currently down 83.2% since its IPO. Yelp is up 7% year-to-date, lagging behind the broader computer software services market, which is up 20.2% in 2019. Both companies have recently struggled with stagnancy and volatility, making an acquisition for either companies questionable.

Investors are Discontent

Investors were discontent with the idea of Groupon potentially making a large transaction that would leave them with a considerable amount of debt. Groupon would need to assume a massive amount of debt to bid for the San Francisco-based company. The market capitalization of Groupon is currently $1.6 billion while Yelp is valued at $2.6 billion.

Activist investors have been pushing Groupon to take initiative to boost its financial performance. Its current valuation is down substantially from the $16.5 billion it achieved in 2011 when it went public. Robert Chapman, founder of California investment firm Chapman Capital LLC, said he sold part of his 10 million Groupon shares because he thinks a large acquisition would be too much of a risk for the company.

Robert Chapman has been lobbying Groupon to buy back more of its own stock and tried forming a coalition with other investors to push for Groupon’s management to make the changes they wanted to see. Groupon held $597 million in cash at the end of its second quarter on top of $382.1 million in debt. The company also reported falling earnings and revenue in Q2 due to fewer customers and lagging consumer traffic.

But Can This Work?

Groupon CEO, Rich Williams (NYSE:WMB), and his team have focused on shifting Groupon to higher value consumers and local commerce. The company recently launched a monthly subscription service in an effort to increase recurring revenue. Rich Williams has indicated in recent months that the company might consider a large transaction as he sees the potential to create a much larger business that can be a part of a consumer’s everyday life.

Despite many investors not loving the idea of Groupon potentially buying out Yelp, there are some people that believe that the two companies coming together might just work out, and could enhance each other’s businesses.

Groupon would give Yelp a new product to sell to retail and service providers and also provide a way for Yelp users to get deals. In turn, Yelp would provide Groupon potential leads especially when it comes to restaurants. It would also provide crowdsourced venue reviews, making both platforms more useful for consumers who are looking to score a deal when dining out.

Bottom Line

This acquisition comes with significant risks and investor pullbacks, making a mutual combination more logical. A mutual pairing makes more sense, as it could create cost saving synergies of $200 million for the companies. Groupon and Yelp have both been struggling individually and are in need of an innovative initiative to spark growth. A potential partnership between Yelp and Groupon would make the sum of both companies more valuable than if they chose to remain separate entities. Yelp and Groupon both sport a Zacks Rank #3 (Hold).

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