OpenTable’s High Premium Boosts Yelp to GrubHub: Real M&A
What do OpenTable Inc. (OPEN), Uber Technologies Inc. and WhatsApp Inc. have in common besides sky-high valuations? Look it up on your phone.
The 53 percent premium Priceline Group Inc. is wooing OpenTable shareholders with tops any other large takeover of an Internet stock in North America since 2007, according to data compiled by Bloomberg. For $2.6 billion, Priceline is getting a business that more than 15 million diners per month use to book tables from the palms of their hands. It’s the latest mobile-application company to command a high valuation for relatively low sales.
As smartphones become increasingly more useful, buyers are paying up for the companies that develop the most popular apps. In February, Facebook Inc. paid such a lofty price for WhatsApp that it valued the chat service like a drugmaker developing cancer treatments, according to an analysis by Bloomberg News. This month, taxi-fetching service Uber was valued at $17 billion, a record for a technology startup in a direct investment round. Yelp (YELP) Inc. and GrubHub Inc. are among companies that rose on speculation they could be next.
The OpenTable deal “shows you that people are willing to pay dearly for the best” tech companies, Mark Lehmann, president at JMP Securities, a unit of San Francisco-based investment bank and asset-management firm JMP Group Inc., said in a phone interview. “Also, there’s lots of capital out there, not that people are willy-nilly spending it, but when they find these crown jewels they’re willing to spend a lot for them.”
OpenTable makes money by helping restaurants accept and manage online reservations and has added other services, including a mobile app that lets customers pay from their tables.
To encourage the company to sell, Priceline needed to bid high, according to Scott Rostan, founder of New York-based Training The Street, which teaches new hires at investment banks how to structure mergers and acquisitions.
Often in the tech industry, “these acquisitions are almost like an R&D investment,” Rostan said in a phone interview. “The seller is going to say, ‘Look, to entice me to do this, I need a big, big, big number because we’ve got all this potential and we’re just scratching the surface.’”
Companies such as OpenTable, Yelp and Groupon (GRPN) Inc. have emerged as key players in local services with smartphone software that ties customers directly to nearby businesses, helping fuel a surge in app popularity. Usage more than doubled in 2013 from a year earlier, according to Flurry Analytics.
“If an Internet company wants to play into the local, mobile secular trend, restaurants are probably the best foot in the door,” Rohit Kulkarni, a San Francisco-based analyst at RBC Capital Markets, a unit of Royal Bank of Canada, said in a phone interview.
Yelp, a restaurant-review site, rose as much as 15 percent yesterday on speculation it could lure deal interest. Along with OpenTable, Yelp was among companies that analysts last month told Bloomberg News were takeover possibilities after technology stocks slumped about 20 percent in two months earlier this year.
GrubHub (GRUB), an online food-delivery service, climbed as much as 11 percent, while daily-deal website Groupon rose as much as 6.6 percent. Online vacation rental booking site HomeAway Inc. (AWAY), highlighted as an acquisition candidate in December, climbed as much as 7.9 percent.
“Obviously the market today is banking on companies like Yelp and GrubHub and Groupon to potentially participate in this” consolidation, Tom White, a New York-based analyst at Macquarie Group Ltd., said in a phone interview. “I wouldn’t be surprised to see Yelp go. HomeAway is definitely interesting, and HomeAway is one where I think the big travel guys would be back in the fold.”
Suitors for Yelp may include Yahoo! Inc. (YHOO) and Google Inc., White said.
“I’d expect it to be one of the big boys,” he said. “Yahoo clearly will likely be acquisitive.”
When Alibaba Group Holding Ltd. goes public later this year, the chunk of shares Yahoo plans to sell could boost its dealmaking firepower to about $10 billion.
Representatives for Mountain View, California-based Google and and San Francisco-based Yelp declined to comment. A representative for Sunnyvale, California-based Yahoo didn’t respond to a request for comment.
OpenTable shares closed at $104.48 yesterday, $1.48 above the offer price, which Lehmann said may be a sign that some investors are betting competing bidders could emerge. On the other hand, it could be a short squeeze, as almost 11 percent of OpenTable’s shares outstanding were sold short, according to Markit data compiled by Bloomberg.
In a short sale, traders sell borrowed stock in a bet the price will fall. An unexpected takeover offer drives the stock price up though, forcing short sellers to pay up to repurchase the shares they borrowed.
Priceline, the biggest U.S. online travel agent, has acquired at least 10 companies since 2002, including Kayak Software Corp. about a year ago, according to data compiled by Bloomberg. The premium for OpenTable, Priceline’s largest target yet, is double what it offered Kayak.
While the $103-a-share offer looks high compared with OpenTable’s average price in the 20 days before the deal, the stock traded above $115 in 2011 and closed at almost $87 as recently as November. The shares ended June 12 at $70.43.
“You may say ‘Wow, they probably could have gotten this cheaper,’” Lehmann of JMP said. But “OpenTable was a $100 stock three or four years ago, so it has seen these heights before. I give Priceline the benefit of the doubt because they have a great acquisition track record, and I would expect this to be another example of where they can do a good job.”
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