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Zillow, Inc. Acquisition of Trulia, Inc.

Thomas Bryan Smith, Serena Dang, and Danica Fiew

University of North Texas MBA

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Zillow, Inc. Acquisition of Trulia, Inc.

On July 28, 2014 Zillow Inc. (Z) announced the purchase of Trulia, Inc. (TRLA) in a

$3.5 billion stock-for-stock transaction. The deal will position the combined entity as the largest

company in online real estate advertising. In this paper we, the University of North Texas MBA

team, will analyze the details of this deal and provide our projections for the future of this stock.

We will conclude with recommendations for trades based on this analysis.

Industry Background—Online Real Estate

The online real estate industry is in the business of creating a repository of home listings

and tools for home buyers to utilize in their search for a new home. Companies in this industry

make a majority of their revenues off of online advertising expenditures from realtors and

companies targeting these home buyers. As more consumers are becoming dependent on the

Internet for information the industry is realizing an increase in the value of online advertising to

access a larger customer base. Currently online channels account for only 56% of total

advertising expenditure in real estatei. Roughly $12 billion is spent annually on real estate

advertising, with Zillow and Trulia accounting for less than 4% of those advertising dollarsii.

This leaves plenty of room for continued growth, and creates a positive environment for success

for firms like Zillow and Trulia.

Even more increasingly important in the industry will be the development of mobile

platforms. In a world like today where technology is omnipresent and access to immediate

information trumps all else, tremendous value will come from home buyers being able to

discover a property on the street and immediately research that property on mobile real estate

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applications. Online real estate companies that can provide a mobile application will continue to

attract and build a large customer base, which is of utmost importance for an industry like this.

The online real estate industry is highly fragmented industry with a vast array of websites

and companies for potential home buyers to choose from. There are a handful of large national

players, but also a variety of smaller, local players. Significant value comes from having a big

name and big market share in the industry. The majority of consumers are more likely to trust a

large, reputable and recognizable brand name to assist them in their search for a new home.

The environment for traditional real estate agents is also experiencing a shift. Real estate

agents are drawn to utilizing online real estate advertising because it can give them access to a

larger base of potential customers than can be reached by print advertisements. Companies in the

online real estate industry can also provide realtors with a centralized database for all of their

leadsiii

. By increasing the lead cultivation cycle with automated tools, realtors would become

more dependent on a platform that combines advertising, sales qualification, and a prospect

database all into one. Even more valuable to realtors is data from potential consumers that will

tell realtors about home buying trends. The increased value of Big Data will provide tremendous

opportunities for new revenue growth for companies in this industry. Companies within the

industry can potentially generate new revenue streams by selling this valuable data to realtors

and other companies.

The real estate market is currently recovering from the housing market crash in 2008 that

lead to one of the largest economic recessions in United States history. Recently the market has

been experiencing a steady increase in home buying. We cannot neglect to mention the

inevitable connection of the health of the housing market to the health of the economy. When the

economy is strained and experiences a significant decline, the housing market experiences a

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proportional dip. This is an important environmental condition for companies in the industry to

keep in mind as they plan for the future. However, even if the economy were to take a turn for

the worst again, companies in this industry will likely not see an entirely devastating effect on

their revenues. When fewer home buyers existing in the market, realtors and advertisers will

compete more aggressively for remaining customers. This will result in a continued steady

revenue stream for these companies.

Another external factor affecting the industry is the shift in home buying from the new

generations of home buyers, the Gen Xers and the Millenials. Many members of these younger

generations are stalling their first home purchases, even when the buy is affordable, claiming

they prefer the ease of rentingiv

. This micro trend is occurring on a very small scale, but is

interesting to note because of the opportunity it presents for further revenue growth. If

consumers become less interested in home buying, and more interested in renting, the companies

in this industry could provide separate rental and commercial property listing services that would

create yet another way to generate revenue growth.

In conclusion, this industry is currently experiencing an environment that is extremely

fertile for growth. Below we will discuss in detail how Zillow’s acquisition of Trulia uniquely

positions the company to capitalize on this advantageous environment.

The Deal

Detailsv

Zillow’s announcement of the acquisition of Trulia includes the following technical details:

$3.5 billion, all-stock

Zillow acquires Trulia

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Trulia shareholders will receive 0.444 shares of Zillow for every Trulia share of

Class A common stock (33% ownership)

Zillow shareholders of Class A and Class B common stock will receive 1 share of

the new company for 1 share of the legacy company (67% ownership)

CEO Pete Flint will remain the CEO of Trulia, but will report to Zillow CEO,

Spencer Rascoff

A new 10 member board will be created with 8 representative from Zillow and 2

representatives from Trulia

Zillow and Trulia will retain their separate brands; only integrate some of the

sales, marketing, and advertising functions

Provisionsvi

Zillow can walk away from the deal at any time for a $150 million termination fee

if the company feels limited by antitrust or government requirements

Trulia can walk away from the deal for a termination fee of $69.8 million

Trulia will face significant limitations on operations during the 18 months leading

up to the deal termination date. During this time frame Trulia cannot:

o Complete new acquisitions

o Make capital expenditures

o Borrow money

o Enter into major employment agreements, except to fill immediately

necessary voids

o Begin any intellectual property actions

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Who gets the better deal?

From looking at the facts of the deal, one could conclude that Zillow is getting the better

of this deal in terms of a greater stake of ownership in the new company and greater flexibility to

walk away from the transaction. However, our team believes that neither company has an

advantage over the other, and neither company gets a “better” deal.

With this transaction Zillow, Trulia, and all stakeholders and shareholders will benefit.

This acquisition will create a new company that holds a 61% share of the online real estate

marketvii

. Economies of scale and scope gleaned from this transaction will enable leveraging of

resources across both companies.

Additionally, Trulia and Zillow bring unique value to the table. Both companies are

experiencing revenue growth beyond analyst and company expectations. This year Zillow is

expecting increase revenue by 58% over last year. Trulia is expecting revenues to increase 76%

over last yearviii

. Neither company carries more weight in revenues than the other. Additionally,

each company has a unique user base with very little consumer overlap. Approximately one half

of Trulia’s monthly visitors do not visit Zillow, and approximately two thirds of Zillows users do

not utilize Truliaix

. Even more, both companies have unique critical intellectual property,

including tools, consumer databases, and housing marketplace information. Zillow brings a

unique and patented mortgage-estimator tool, “Zestimate” to the deal, and Trulia brings patented

realtor software, interactive maps, and visual toolsx. Lastly, this deal will eliminate legal costs for

both companies, as they have been entangled in a lawsuit over patent infringement since

September of 2012xi

.

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Challenges

Zillow and Trulia will face many challenges that will be critical to the success of the

stock and the success of the company. Although there are antitrust concerns from the

government, the acquisition will likely not be considered a significant threat to pricing power

and consumers. Notably, previous acquisitions of large competitors by both Zillow and Trulia

have faced no antitrust intervention. Furthermore, the residential real estate industry is

fragmented and highly local, and therefore is not largely threatened by market dominancexii

.

The largest challenge facing this acquisition is the integration plan, or rather, the lack

thereof. Zillow and Trulia have announced plans to continue to operate as separate brands, and

will likely retain most of their employeesxiii

. Zillow CEO, Spencer Rascoff, announced on July

28, 2014 that the two companies will integrate only services such as sales and marketing, and

some advertising functionsxiv

. This announcement creates concerns for a number of reasons. The

most valuable mergers and acquisitions are those that are accretive. The goal of merging two

entities is to create exponentially more value operating as a combined entity than each company

could produce independently. This exponential value is achieved through combining shared

resources and reducing redundancies, thereby creating a more viable cost structure. Controlling

cost structures is critical to merger success, and Zillow is not yet realizing this to full potential.

Because of vague and ambiguous announcements of integration plans, investor confidence has

been wavering, as has been evidence by the recent dip in stock price. Zillow and Trulia’s current

executive team seems to lack experience in merger integration. Investor confidence could be

restored by implementing a new, third-party CEO with experience in mergers and acquisitions,

or by hiring a Post Merger Integration (PMI) team that would help the company get the most out

of merger synergies.

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Though the two companies are experiencing substantial increases in revenues, both

companies have reported negative earnings before tax and interest, and also negative net incomes

in their most recent income statements from December 2013xv

. Both companies are coming into

this deal already operating at a loss, with profitability being confined by high cost structures and

the cost of funding innovation. This is often the case in high-growth markets, and yet another

testament to why it is so critical for Zillow and Trulia to integrate further.

With any merger or acquisition, culture integration is key to success. Investors may have

some concerns over the success of integrating two companies that have long been each other’s

top competitor.

Opportunities

This deal has tremendous opportunity for success, if it is managed correctly. As the #1

and #2 companies in the industry Zillow and Trulia will combine to hold an overwhelming

majority of market share in online real estate listings, which gives them a first-mover advantage

and positions them as industry leadersxvi

. Users are more inclined to visit the largest, most

reputable sites, and the increase in users will drive increased revenues from realtors will to pay

more to access this growing user base.

Even more beneficial are the unique offerings that Zillow and Trulia bring to the table.

Zillow and Trulia each have a unique user base with very little consumer overlap, as previously

mentioned above. Both companies also own unique intellectual property. Zillow and Trulia were

one of the firsts in the industry to develop and patent unique technological features such as

Zillow’s “Zestimate” home mortgage feature and Trulia’s crime heat mapxvii

. These unique

technological features are prime differentiators from competitors in the industry. Zillow and

Trulia are positioned to not only lead the market in terms of market share and revenue, but also

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in terms of innovation and technological tools, which will help drive a stronger competitive

advantage.

The company’s access to Big Data is very promising. Big Data can be leveraged to fuel

innovation within the company, and it can also be sold to other companies to provide another

revenue stream. The company must share their unique data with each other in order to drive

further development, but this will require significant integration efforts to achieve these

synergies. In fact, none of these strengths will help the company if the company does not

implement structures that will allow it to integrate properly and to leverage these benefits to best

of its ability.

There are two additional strategic directions that could provide value for the

company. Both Zillow and Trulia could benefit from expanding their core competence in home

buying to create a sustainable core competence in rental and commercial properties. Increasing

market segmentation through expanding further in these types of listings would create yet

another revenue stream for the rapidly growing company. This keeps the company diversified so

it can survive better, even in times of economic downturn. If less people are buying houses, then

it is likely they are now renting. Therefore, although the company may be losing the home buyer

user traffic due to environmental trends, they could gain those users back as part of the renter

market traffic. Furthermore, a competency in rental properties would accommodate any shift in

generational trends, such as the shift trends of the Millenials in home buying, mentioned above

in our industry analysis.

Competition—An Indicator of Future Industry Success

On September 30, 2014 News Corp announced that they would purchase the third-ranked

online real estate mogul, Move, Incxviii

. This move follows the pattern of industry consolidation

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that Zillow and Trulia began. Although this deal will position Move, Inc. to have significantly

less market share than Zillow and Trulia combined, the deal demonstrates the large potential that

the online real estate market has. News Corp has announced that they will fully integrate Move,

Inc. into their portfolio to achieve the ultimate benefits of synergies, cost reduction, and leverage

of News Corp’s advertising competencies. Because of this strategy, it appears that investors have

more faith in News Corp’s acquisition plan than they currently have in Zillow’s acquisition plan,

as evidenced by Move’s stock price, which has risen sharply and is continuing to maintain

valuexix

.

Future Outlook

Wall Street investors appear to lack confidence with the integration and growth plans that

have been communicated in the Zillow and Trulia deal thus far. This has been evidenced by the

behavior of both Zillow and Trulia’s stock prices since the announcementxx

. When Zillow

announced the acquisition, both stock prices skyrocketed, representing the enormous potential

this deal holds.

However, shortly after the initial announcement, the stock price of both companies began

to decline steadily. Analysts were becoming concerned about the realization of merger synergies

before News Corp entered the picture. This decline was hastened by the announcement of News

Corp’s acquisition of Move Inc. This decline in stock price should concern the executive

management team and board of directors at Zillow, but should also excite potential long-term

investors as they now have an opportunity to buy into a promising company for a much lower

price than what it should be valued at.

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Projections

We expect that the stock prices of Zillow and Trulia will continue to decline, especially if

Zillow and Trulia do not provide clearer and more consistent information about merger

integration plans. This will have tremendous implications for both short-term and long-term

investors. Many short-term “arbitrage” investors will continue to sell their stock because they are

concerned that it will not make them a quick return. This will cause the stock price to plummet

even further, which makes it a perfect time for long-term investors to buy in. Because of the

aforementioned benefits, we firmly believe that this stock will be a worthwhile investment in the

long-run. Whether or not the company decides to pursue deeper integration and leveraging of

resources, there are too many benefits surrounding this deal for it to fail. This combined

company is facing a “perfect storm” of sorts that will only be positively exacerbated by finding

further merger synergies.

Recommendations

If our analysis of the benefits of this deal are not enough to increase investor confidence

in this stock then perhaps past performance will aide. Over the past five years the price of Zillow

stock has quadrupled and the price of Trulia stock has doubledxxi

. With merger synergies being

realized these prices will only continue to go up as they have for the past five years.

In summary, as the deal currently stands this stock will provide a significant return in the

long-run. The deal will provide even stronger returns if the company can communicate

integration plans successfully and get the most out of merger synergies. With stock prices so low

at this current moment, long-term investors would be wise to take advantage of such a

tremendous opportunity. Buy now or forever hold your peace.

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Appendix A

Table 1.0 US Digital Ad Spending by Channel, 2012-2018

xxii

Table 2.0 Advertising Media to Watch

xxiii

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Appendix B

Chart 1.0 Zillow Stock Price Over 6 Monthsxxiv

Chart 2.0 Trulia Stock Price Over 6 Monthsxxv

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Chart 3 .0 Move Stock Price Over 6 Monthsxxvi

i Corbett, J. (2014, January 30). Why Digital Marketing Fails for the Real Estate Industry.

BoomTown!. Retrieved November 2, 2014, from http://boomtownroi.com/why-digital-

marketing-fails-for-the-real-estate-industry/ ii Garrison, T. (2014, September 10). FTC approval of Zillow-Trulia deal hinges on agent

advertising. Housing Wire. Retrieved on November 2, 2014, from

http://www.housingwire.com/articles/31321-ftc-approval-of-zillow-trulia-deal-hinges-on-

agent-advertising iii

See (Corbett, 2014) above, i. iv

Mullins, D. (2014, July 17). Study: Millenials can afford homes, but aren’t buying. Aljazeera

America. Retrieved November 2, 2014, from

http://america.aljazeera.com/articles/2014/7/17/millennials-homebuyingrenting.html v Zillow Announces Acquisition of Trulia for $3.5 Billion in Stock. (2014, July 28). PR

Newswire. Retrieved on November 2, 2014, from

http://investors.zillow.com/releasedetail.cfm?ReleaseID=862266 vi

Solomon, S. (2014, July 31) In Real Estate Listings Deal With Zillow, Trulia Bears Most of the

Risk. The New York Times DealBook. Retrieved November 2, 2014, from

http://dealbook.nytimes.com/2014/07/31/in-deal-for-real-estate-listing-trulia-zillow-

comes-out-on-top/?_r=0 vii

De La Merced, M. (2014, July 28). Zillow to Buy Trulia for $3.5 Billion in All-Stock Deal.

The New York Times DealBook. Retrieved November 2, 2014, from

http://dealbook.nytimes.com/2014/07/28/zillow-to-buy-trulia-for-3-5-billion/

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viii

Cao, J. & Tam, P. (2014, July 28). Zillow to Acquire Trulia for $3.5 Billion in Stock.

Bloomberg Business. Retrieved November 2, 2014, from

http://www.bloomberg.com/news/2014-07-28/zillow-to-acquire-trulia-for-3-5-billion-in-

stock.html ix

See (Zillow Announces, 2014) above, v. x Trulia Launches Crime Maps to Add Insight and More Complete Data to American

Neighborhoods. (2011, June 2). Trulia. Retrieved November 2, 2014, from

http://info.trulia.com/index.php?s=32055&item=106144

Zestimate. (n.d.). Zillow. Retrieved on November 2, 2014, from

http://www.zillow.com/zestimate/ xi

Cook, J. (2012, September 13). Zillow sues Trulia for patent infringement, escalating bitter real

estate rivalry. Geek Wire. Retrieved November 2, 2014, from

http://www.geekwire.com/2012/bitter-rivalry-escalates-zillow-sues-trulia-patent-

infringement/ xii

Garrison, T. (2014, July 30). Wall Street doesn’t see antitrust hurdles for Zillow’s Trulia

acquisition. Housing Wire. Retrieved November 2, 2014, from

http://www.housingwire.com/articles/30853-wall-street-doesnt-see-antitrust-hurdles-for-

zillows-trulia-acquisition xiii

Lerman, R. (2014, July 28). Will Zillow see big layoffs from Trulia merger? Puget Sound

Business Journal. Retrieved November 1, 2014, from

http://www.bizjournals.com/seattle/blog/techflash/2014/07/will-zillow-see-big-layoffs-

from-trulia-merger.html?page=all xiv

See (Lerman, 2014) above, xiii. xv

Trulia, Inc. Income Statement. (2013, December) Yahoo Finance. Retrieved on November 2,

2014, from http://finance.yahoo.com/q/is?s=TRLA+Income+Statement&annual

Zillow, Inc. Income Statement. (2013, December) Yahoo Finance. Retrieved on November 2,

2014, from http://finance.yahoo.com/q/is?s=Z+Income+Statement&annual xvi

Davidson, J. (2014, July 28). What a Zillow/Trulia Merger Might Mean for Consumers. Time

Money. Retrieved November 2, 2014, from http://time.com/money/3047329/zillow-trulia-

merger-consumers/ xvii

See (Trulia Launches, n.d.) and (Zestimate, n.d.) above, x. xviii

Bloomfield, D. (2014, September 30) News Corp. to Buy Owner of Realtor.com for $950

Million. Bloomberg Business. Retrieved November 2, 2014, from

http://www.bloomberg.com/news/2014-09-30/news-corp-to-buy-real-estate-business-

move-in-950-million-deal.html xix

Move Stock. (n.d.). Yahoo Finance. Retrieved November 2, 2014, from

http://finance.yahoo.com/echarts?s=MOVE+Interactive# xx

Trulia Stock. (n.d.). Yahoo Finance. Retrieved November 2, 2014, from

http://finance.yahoo.com/echarts?s=MOVE+Interactive#

Zillow Stock (n.d.). Yahoo Finance. Retrieved November 2, 2014, from

http://finance.yahoo.com/echarts?s=MOVE+Interactive# xxi

See (Trulia Stock, n.d.) and (Zillow Stock, n.d.) above, xx. xxii

Total US Ad Spending to See Largest Increase Since 2004. (2014, July 2). eMarketer.

Retrieved November 2, 2014, from http://www.emarketer.com/Article/Total-US-Ad-

Spending-See-Largest-Increase-Since-2004/1010982

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xxiii

Special Report Advertising and technology. (2014, September 13) The Economist. Retrieved

November 2, 2014, from http://www.economist.com/news/special-report/21615869-

technology-radically-changing-advertising-business-profound-

consequences?fsrc=scn/fb/wl/vi/littlebrother xxiv

See (Zillow Stock, n.d.) above, xx. xxv

See (Trulia Stock, n.d.) above, xx. xxvi

See (Move Stock, n.d.) above, xix.