MorningWord 6/17/14: A Shopping List for The Big Boys

by Dan June 17, 2014 9:43 am • Commentary

Priceline’s (PCLN) announcement of a $2.6 billion acquisition of OpenTable (OPEN) for a 46% premium last week set the wheels in motion for what could be a land grab for internet “services.” A land grab that is most likely geared towards those that see their future on the small screen.   Following the announcement, investors hurried to place their bets on anything that could be the next deal. Since Friday’s OPEN announcement, Yelp has risen 11%, gaining about $550 million in market cap (now at $5.25 billion), Zillow has gained about 8%, sporting a $5.1 billion market cap, and Trulia (TRLA) has gained about 7% in 2 trading days.

Investors view these companies as fairly similar to that of OPEN with business models that exist based on a cataloged group of data where searchers and the listers are BOTH the customer.  While combinations among larger providers of services over the web make sense, there are only so many companies out there that can make a knock-out bid for a Zillow that already sports a $5 billion market cap trading at almost 22x trailing sales. Prior to the bid for OPEN, the stock had a lil $1.2 billion market cap, traded at 6x trailing sales that have grown at about 17% for the last two years with rapidly decelerating earnings growth.   This deal was a pimple on PCLN’s butt with a $60 plus billion market cap, and $6.7 billion in cash on their balance sheet.  This combination makes a ton of sense and was and will likely be a financial afterthought for PCLN, but one that could reap significant rewards if the company is able to use their scale and geographic footprint to expand OPEN’s offerings.

I know, I know, in a market where companies like Uber are getting private valuations of $17 billion based on recent investments, and companies like WhatsApp with no revenues can be bought for $19 billion in cash and stock, surely a few more publicly traded Internet 2.0 stocks are likely to be gobbled up.

Who are the acquirers? The usual suspects, AAPL, AMZN, GOOG, MSFT, YHOO.  So here it goes, the gun to my head guesses of internet service deals (with a heavy emphasis on guesses):

-AMZN buys Pandora (P) for $7 billion to give some heft to their Amazon Prime media offering and to prominently place a music service that almost 80 million people use on their soon-to-be-announced smartphone.

-GOOG buys TWTR for $30 billion.  GOOG has a massive blind-spot when it comes to Real-Time search, and a very poor social media strategy.

-YHOO buys YELP for $7 billion as the company is a logical fit as YHOO needs a stronger local strategy. YELP is prominently displayed in AAPL maps and they will soon be flush with cash.

-AAPL buys PayPal from EBAY to make a huge push in mobile payments. This would be one of the more massive deals and would obviously be a huge fight at Ebay.

This is more of a thought exercise than any sort of prediction, but in the current M&A boom, it’s worthwhile to be on your toes in considering future tie-ups as the big boys assess the landscape for opportunities.