Don't Bet on a Yelp Buyout Now

After the reported acquisition interest in Twitter (TWTR), Yelp (YELP) also got caught up in the merger and acquisition chatter and ended the day up almost 2.4%. Yelp bulls expect—and have been expecting—some company like Alphabet (GOOG) to buy it out.

While Alphabet buying Yelp would make sense, I don’t think investors should buy Yelp on the hopes of an acquisition as the chances of that happening are pretty low.
There are several reasons why I think Yelp won’t get acquired, especially at close to $40 a share.

First, Yelp has been on the lookout for a potential buyer for over a year now. The company has reportedly drawn interest from companies likes Priceline, Facebook, Expedia and Alphabet several times in the past, but to no avail. Yelp even hired banks in spring of 2015 to find a buyer.

Yelp has been crying for a buyout for over a year now, yet it has found no potential suitors, which is a big red flag for investors now. No company thought Yelp deserved to be acquired at $40 per share last year and not much has changed since then for Yelp to warrant a buyout at these levels.

Back in February, I did recommend investors to cover their short positions as Yelp was trading at a bargain and was a potential acquisition target.
Don
Image by StartupStockPhotos / Pixabay
The stock was near its 52-week lows and would have been a good buyout play back then. However, Yelp has seen its shares jump almost 150% since then, which makes the case for its buyout very weak.

Although Yelp’s business has improved marginally since then, the company is very expensive (and controversial) to buy at current levels. Moreover, going by the past, Yelp executives will probably demand a hefty premium for the company, which again does not look good for its acquisition prospects. Thus, I would advise investors to sell the stock after the recent rally.

Conclusion

Yelp has rallied strongly over the last few months, and although the company’s business has improved marginally, I don’t think it is a buyout candidate. The stock is too expensive at current levels and given that it has struggled to find potential buyers for a long time now, I don’t think Yelp will find it any easier now that the stock is up 150% upon marginal improvement in its business. I think the stock is a sell after the recent rally.

Disclosure: No position
Published on Sep 28, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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