Yelp, Inc. (
YELP

) operates a social networking website that allows users to rate
and review different places. The company’s journey so far has
been inconsistent. Even though Yelp has managed a steady rise in
its revenue, the costs of its operations have also risen
significantly, and this has weakened its overall financial
performance. However, there have been talks of a possible merger
between Yahoo and Yelp that could help Yelp get on the track to
profitability.

Yelp as Yahoo’s Potential MA Target

One of the factors that could assist Yelp in stabilizing is a
significant strategic change. Such a change can come from the
company’s merger with or acquisition by a bigger entity. The
recent trend suggests that Yelp is a potential MA target for
Yahoo Inc. (
YHOO

). Since the appointment of Merissa Mayer as Yahoo’s CEO, Yahoo
has been going through some extensive strategic changes, and one
of the changes is an increase in MA activity.

While discussing Yahoo’s earnings for fourth quarter 2012, Mayer
said, “The combination of more personalized content and increased
product innovation will be key in getting us back to a path for
display revenue growth.” She also pointed towards the fact that
the company intends to make developments in the path of personal
content, and some analysts infer that Yelp provides the services
that Yahoo is seeking.

Other reasons why Yelp could be the perfect MA target for
Yahoo is the fact that Yelp has continuously reported a
significant increase in revenue year over year. Yelp’s revenue
increased by 65% to $41.2 million in fourth quarter 2012,
compared to the same quarter last year. The company also expects
a significant rise in revenue for the same period in 2012.

Another factor that could encourage Yahoo to acquire or merge
with Yelp is the competing nature of operations. Yelp’s service
directly competes with Yahoo’s similar service called Yahoo
Local. By acquiring Yelp, Yahoo could strengthen Yelp’s services
and endorse both websites at the same time.

Since the appointment of the new CEO, Yahoo has made some
extensive changes that have had a positive impact on the
company’s financial and market performance. For fourth quarter
2012, Yahoo’s profit margin was 9.27%; on the other hand, Yelp
reported a loss margin of -12.92%.

Another company that provides a similar service as Yelp is Dex
One Corporation (
DEXO

). Dex is not a feasible target for Yahoo because of its small
size and a slight contradiction with the nature of the business.
The services of Dex and Yelp are very similar; however, they both
have reversed roles. Where Yelp promotes business through
customer reviews, Dex introduces businesses to customers through
various marketing solutions. For fourth quarter 2012, Dex
reported a loss margin of -3.96%.

Yelp’s Market Performance

The market performance of Yelp has been extremely volatile in
past months. There have been several high and low trends for the
company’s share price. Currently, the shares are being traded
within the range of $24.88 and $25.40; however, the 52-week range
of the share price of the company has been between $14.10 and
$31.96. The difference between the two extremes and the current
share price suggests that market performance has fluctuated
vigorously in the past 52 weeks. The following chart represents
the trends of the company’s share price over the past year.

The chart shows that the share price has fallen and risen steeply
multiple times over the past year. Comparative stability can be
observed towards the end, but considering the past trend,
trusting this stability may not be wise.

After analysis of the relevant factors, in my opinion, investors
should hold their investments in Yelp. I believe that the market
performance of the company is highly volatile, and buying the
shares at this point will be risky. Yelp will be a good
investment to buy if the rumors regarding its merger with Yahoo
turn out to be true. Otherwise, Yelp will remain a risky
investment in the foreseeable future.

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