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Should Investors Buy Groupon Stock After Yelp Takeover Rumor?

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

Source: Ken Wolter / Shutterstock.com

GRPN stock has struggled since going public; it’s currently down over 80% since its IPO. YELP stock is up 7% in 2019,  lagging behind the  computer software services market, which has climbed about 20% in 2019. Both companies have recently been stagnant and volatile, making an acquisition by either company questionable.

Investors Aren’t Happy With the Deal   

Investors weren’t pleased with the idea of GRPN potentially making a large transaction that would leave it with massive debt. The market capitalization of GRPN stock is currently $1.6 billion, while YELP stock is valued at $2.6 billion.

Activist investors have been pushing Groupon to implement initiatives that are likely to boost its financial results. The current market cap of GRPN stock is down substantially from the $16.5 billion it  reached in 2011 when it went public. Robert Chapman, founder of California investment firm Chapman Capital LLC, said he sold some of his 10 million shares of GRPN stock because he thinks the acquisition of Yelp will be too risky for the company.

Chapman, who has been lobbying Groupon to buy back more GRPN stock, tried forming a coalition with other investors to push the company  to make changes. GRPN had $597 million of cash at the end of its second quarter, while its debt stood at $382.1 million. In Q2, Groupon’s earnings and revenue fell,  as it had fewer customers and traffic on its websites dropped.

But Can the Deal Work?  

Groupon’s CEO, Rich Williams and his team have focused on attracting higher-value consumers, and they’ve sought to feature more  local deals. GRPN recently launched a monthly subscription service in an effort to increase recurring revenue. In recent months, Williams had indicated that the company might consider a large transaction. The CEO explained that he saw potential to create a much larger business that can be part of consumers’ everyday life.

Despite many investors not loving the idea of GRPN  buying Yelp, there are some people who believe that the combination might just work out because the companies can enhance each other’s businesses.

If the deal goes through, Yelp would be able to convince retailers  and service providers, especially restaurants, to market their wares through GRPN,  while offering GRPN’s deals  to Yelp’s users.

The Bottom Line

The merger would make sense as it could create cost-saving synergies of $200 million for the companies. Groupon and Yelp have both been struggling individually and  need to make innovative changes  to spark growth. A potential merger would make both companies more valuable than if they choose to remain separate entities. Yelp and Groupon both have a Zacks Rank of #3 (Hold).

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Article printed from InvestorPlace Media, https://investorplace.com/2019/09/should-investors-buy-groupon-stock-after-yelp-takeover-rumor/.

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