Is Angie’s List the Next Big Takeover Target?

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Is Angie’s List the Next Big Takeover Target?

Ah, the takeover. From a shareholder’s perspective, you just can’t beat it.

Takeovers represent instant gratification.

Who cares if the deal ultimately adds synergy to the acquiring company, right?

As a shareholder, you just want that pop!

Shareholders of PokerTek, Inc. (PTEK) got their pop yesterday.

The company, which manufactures automated poker tables for casinos, opened 32% higher on news that it had entered into a definitive agreement to merge with Multimedia Games, Inc. (MGAM).

Shareholders of energy stalwart, Pepco Holdings, Inc. (POM), felt the pop yesterday, too.

News broke that Pepco was acquired by Exelon Corporation (EXC).

Pepco shares opened 18% right at the Opening Bell.

This is a particularly interesting deal because it marries Exelon’s top three performing electric and gas utilities (BGE, ComEd and PECO) with Pepco’s electric and gas utilities (Atlantic City Electric, Delmarva Power and Pepco).

It also gives Exelon an airtight lock on the heavily populated Mid-Atlantic market. Dare I say it’s cornered the market?

When I spoke to Karim Rahemtulla concerning the deal, he said it’ll be difficult for anyone living in Maryland, Delaware, Virginia, Washington, D.C. and parts of New Jersey to avoid using Exelon in some capacity.

The combined entity will service roughly 10 million customers, and will certainly impact the region’s competitive landscape.

Yesterday’s takeover news is only the tip of the iceberg, though.

As Karim explains, a meaningful trend is upon us, especially inside the technology sector.

Turns out, all buyout targets in the tech sector share a common attribute. Once you know what the attribute is, nothing is stopping you from exploiting it over and over again.

~Robert Williams, Founder, Wall Street Daily

There’s an unmistakable trend occurring in the tech sector right now.

In short, big companies are scrambling to buy up smaller operations with strong user bases. Their goal? To connect with more eyeballs, of course . . .

Take Facebook’s (FB) recent $19.2-billion buyout of the messaging service, WhatsApp.

WhatsApp has no significant earnings or revenue to speak of – certainly not anything worth a $19.2-billion price tag.

But since WhatsApp is a free text-messaging service with a global reach – I actually use the app when I’m overseas – what it does have is a ton of future potential to connect with users.

WhatsApp is well on its way to reaching one billion users within the decade. So the potential for squeezing advertising revenue from the mobile platform is quite appealing.

That’s not all, though. Facebook wasn’t just interested in purchasing the technology. It wanted the customer support behind the technology, too.

You see, WhatsApp is one of the most liked and respected messaging services around. That’s insanely important these days, as the technology sector becomes increasing crowded with more and more apps.

Essentially, a great technology is worthless if people don’t use it, find it complex, or – worse yet – don’t trust it.

In other words, trust is everything when it comes to building customer loyalty.

This isn’t just evidenced by the buyout of WhatsApp, either.

We’re seeing more and more companies paying top dollar for smaller firms that maintain a strong, loyal user base . . .

Big Companies Aim to Purchase Customer Loyalty

Take Urbanspoon, for example. It’s well respected for its review-based web business that allows users to rate restaurants and other establishments. It was bought by Interactive Corp (IACI) several years ago for millions.

Yahoo! (YHOO) picked up blogging site, Tumblr, last year for over a billion dollars.

Facebook bolstered its photo and video capabilities with Instagram for $1 billion.

And just a few months ago, Google (GOOG) offered to scoop up photo-sharing app, Snapchat, for $3 billion.

Now, just like WhatsApp, these companies don’t boast strong revenue models.

But they’re all respected by their users. They don’t pander to advertisers. Plus, they offer a strong perception of impartiality.

And the amount of people who use (and trust) their services could generate a ton of revenue for the companies that purchase them.

So why bring any of this up?

Well, there’s one company that’s currently trying to defy this model of trust.

While it has the hallmarks of what it takes to become a major success story, the market just isn’t buying it. And neither am I . . .

The Perfect Short-Sell Candidate

That company is Angie’s List (ANGI) . . .

If you’re unfamiliar with the company, it’s a subscription-based site that rates service providers – from doctors to carpenters – across the country. So people who’ve hired a landscaper or contractor can later review their work on the site.

The information is easy to access, and the subscription is pretty cheap – especially when you consider how much money you could lose if you hire the wrong person to, say, remodel your kitchen.

Still, with more than 36% of the company’s shares shorted right now, investors are obviously skeptical about ANGI’s business model.

And they should be . . .

While the company is experiencing growth, the majority of that growth isn’t coming from users. Instead, it’s coming from service providers.

In other words, the people who are being reviewed are paying more money to advertise on Angie’s List. In return, they get bumped to the top of the ladder whenever someone performs a search.

Buying your way up is not a sustainable business model. And, more importantly, it doesn’t promote trust with your users.

To top it off, Angie’s List works well in big metro areas where consumers have plenty of contractors to choose from. But it’s not so great in less-populated areas, where most people use word of mouth to endorse services around town.

Bottom line: The most successful companies in tech today are driven by a strong user base. And if that business model isn’t free and transparent, users will go elsewhere. So don’t expect to see any buyout interest for Angie’s List anytime soon. In fact, it could make for a great short-sell candidate.

Ahead of the tape,

Karim Rahemtulla

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