Yelp and GrubHub – A Merger of Equals
by Claudio Stefan, MBA '18 (4/27/17)
At this point in the immersion, the training wheels have almost completely come off. After having gone through an IPO, a debt offering, an M&A transaction, and a leveraged buyout, we have all the necessary tools to examine a strategic transaction on our own. To simulate the dynamics of the summer internship, the IBI cases now provide much less guidance and allow us the freedom to construct the pitchbook and coordinate the deal the way we see fit.
This is a double-edged sword, as we soon see with the theoretical acquisition of GrubHub by Yelp. We must now make a decision on how to structure the transaction and its consideration mix in a way that gets the deal done favorably for our hypothetical client. This particular acquisition is especially interesting. The two companies are basically the same size, and GrubHub has been performing better than Yelp as of late. Both firms are also under a potential existential threat from larger, established competitors with deeper pockets: Google and Facebook for Yelp, and UberEats, Amazon, and a host of VC-funded startups for GrubHub. It seems that the two companies need one another to drive web traffic and ultimately gain the necessary scale not only to survive, but prosper.
Given the firms’ similar relative sizes, our group starts researching the potential for a Merger of Equals (MOE). The issues with such a transaction structure are much different from what we have examined in the IBI so far – they primarily focus on corporate governance and control. Who will be the president and who will be the CEO? What will the board split look like? How do we make a case for our hypothetical client (Yelp) to receive additional control?
After a week of debate and research into MOEs, our group is not quite convinced that this is necessarily the best structure. Mergers of Equals have a less-than-stellar track record. It seems to us that from a corporate governance perspective, one party needs to be firmly in control. We also are not convinced that GrubHub’s management and shareholders would be receptive to such a proposal, since recent results indicate they possess a potentially superior asset. However, since this is a fairly obvious alternative, we outline how such a transaction structure would work, but also take a detailed look at a regular acquisition, financed through stock and debt. We map out the combined entity’s historical and projected cashflows, outline liquidity and coverage metrics, and perform a detailed accretion and dilution analysis. We now have two solid alternatives to present to our hypothetical CEO.
On Monday, three teams present and all do an amazing job. I am extremely impressed by the quality of everyone’s pitchbooks, their ease in answering unexpected questions, and their creativity with proposed transaction structures. This, along with Drew’s debrief of the case, is by far my favorite part of the immersion – hearing my classmates’ thoughts and their approaches to each problem always gives me perspective on how to improve. It’s hard to believe that we are able to have such in-depth discussions and present such a solid product after only a few months of training. There is still a long way to go, but as the summer draws near, I grow more confident with each passing day.