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Is Yelp Buyout Bait?

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Tom Taulli

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Shares of review website Yelp (YELP) spiked 12% yesterday — extending the company’s year-to-date run to 85% — but most out there were left scratching their heads, as there were no major reports that could’ve fueled such a move.

Usually when you see that kind of stock shimmy, but there’s little in the way of solid developments backing it up, it’s not crazy to think the “something” causing it might just be a little good, old-fashioned buyout hope.

Recently, there has been talk that Yelp might partner with Facebook (FB), lending its local-search technology to Graph Search — something that could provide another nice boost to Yelp’s business.

But considering that local search is becoming an essential service for mobile, it’s not crazy to think YELP could do much better than a partnership — it would make an attractive buyout target for Facebook, or even other companies like Apple (AAPL).

Yelp has become a top-of-mind brand for local search. Its users have contributed nearly 40 million reviews across businesses like restaurants, salons, mechanics, plumbers and dentists, among others. And that has driven performance numbers such as last quarter’s sales, which jumped 68% to $46.1 million to beat expectations, and helped trim the year-ago period’s profit deficit of $9.8 million to a $4.8 million loss.

The company is no stranger to using partnerships to spur growth. Perhaps Yelp’s most important deal has been with Apple (AAPL), which has tightly integrated Yelp with Siri and Apple Maps. The result has been a strong growth ramp in mobile. While only about 10% of the 102 million unique users for Q1 came from mobile, they accounted for a hefty 43% of the searches and 36% of local ads.

Still, many other big-time operators could benefit from a Yelp transaction. Microsoft (MSFT) desperately wants to get a bigger penetration in the mobile space. The same goes for Yahoo (YHOO), which recently shelled out $1.1 billion for Tumblr.

Google (GOOG) could be another potential buyer, though here you might have issues with antitrust laws.

But of all the possible suitors, Apple might be best.

Apple is trying to find ways to pump up growth, and local e-commerce is an opportunity that could move the needle. According to BIA/Kelsey, the U.S. online ad market is expected to gap up from $23.1 billion in 2012 to $41.1 billion in 2017. As of right now, Yelp’s looking at a market that includes 53 million local businesses in the U.S. and western Europe alone.

Besides, Yelp has already done the heavy-lifting of building an effective platform; it has created sophisticated systems that filter reviews for quality and authenticity. That platform has been pushed by community managers across nearly 100 markets who help foster brand awareness and bolster reviews.

The obvious hang-up here is that Apple is notoriously averse to big mergers acquisitions, but Apple’s sitting in the relatively unfamiliar — and certainly uncomfortable — position of starting to look like a tech-also ran (and with a stock performance to match).

With $145 billion in cash, Apple could easily snap up a variety of category-leading online and mobile operators. Yelp, as a target, would not only get Wall Street’s attention, but provide AAPL with a legitimate business spark.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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