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Team Name: CityUHK Name of Participants: Xiaolin Nie, Xiao Zhang, Chris Chen Name of University: City University of Hong Kong Title: Zillow+Trulia>2?

Zillow+Trulia > 2？

Outline Part I Background of Acquisition 4 1. The U.S real estate market 4 2. Market players 5 3. Market share 5 Part II Zillow+Trulia>2? 7 1. Financial performance of Zillow and Trulia. 7 (1) Price-to-Sales Ratio 7 (2) Revenue and cost 8 (3) Conclusion 9 2. Competition 10 (1) Comparison between Zillow and Trulia 10 a. Organizational Structure differences 10 b. Operation modes differences 14 (2) Comparison with other competitors 18 a. On-line competitors 18 b. Realtors 20 3. Anti-trust Issue 22 Part III What if the Acquisition Fails. 23 1. Price war-both sides suffer 23 2. Co-exist 24 Part IV Conclusion 25

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Zillow + Trulia > 2?

Abstract

The paper compared operation modes of real estate information providers in America, and gave out a forecast of the new company's stock price trend based on previous performance of Zillow and Trulia in stock market. The anti trust issues has also been taken into consideration. Stock prices of Zillow and Trulia increased after the news of acquisition, and then went down after a month. As a conclusion, we don't recommend further investment on Zillow and Trulia because of lacking of pricing power against realtors and lacking of profitable capacity. The concern of earning abilities of both companies has been explained in the paper.

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Zillow + Trulia > 2?

Part I

Background of Acquisition

1.The U.S real estate market:

U.S Real estate industry goes up and down according to the performance of American economy and to the fluctuation in interest rates. Real estate mirrors American economy.

The price of houses in America is rising; sales of new single-family homes are rising to a six-year high in September 2014 as well.

The real estate market is recovering from the financial crisis 2008 slowly. The rising of housing prices indicates a foreseeable growth of the U.S real estate market.

House price change - FHFA index

Change over a year earlier

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2. Market players:

The players of American real estate market include house sellers, buyers, realtors, and, on-line real estate information providers. Every activity is under authority of American government in order to protect the system. The relationships among these market players can be shown via following graph.

The leading actors of this case are two of America’s largest on-line information provider

Zillow and Trulia, they announced an acquisition in July 2014.

3. Market share of the U.S real estate information providers:

There are dozens of such websites in America. They can be divided into two sets according to different profit models.

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Zillow, Trulia and others: Revenues come from Marketplaces like housing and mortgage, advertising fees. Reflin and others: Revenues come from agency fees. Hired in house agencies.

The performances of these websites are largely depending on the amount of visitors.

The market shares of visitors can be seen from bar chart below:

Share of visits

1. Zillow 2. Trulia.com 3. Realtor.com 4. Yahoo! Homes 5. Homes.com 6. Apartment Guide 7. Rent.com 8. Redfin 9. MSN Real Estate 10. LoopNet 11. HomeAway 12. Apartments.com 13. ForRent.com 14. Movoto 15. ZipRealty 16. Century 21 Real Estate 17. Caring.com 18. ApartmentFinder.com 19. HAR.com 20. Rentownhomelistings.com

Zillow and Trulia are expected to occupy over 60% of total market in the U.S.

According to the agreement of acquisition, Zillow and Trulia will operate separately before 2015 when the merges compete. Zillow is expected to lead the market based on a large occupation, while Trulia and other subsidiaries are expected to focus on various

City University of Hong Kong business departments and models under control of Zillow. A giant in real estate information provider will raise in front of American public, integration effect of the combination would be huge if Zillow merged more companies in the market.

Part II Zillow+Trulia>1?

Problems:

---Will you buy the stocks of Zillow or Trulia during the acquisition?

1. Financial performances of Zillow and Trulia:

(1). Compare P/S (Price-to-Sales) Ratio of Zillow and Trulia with relevant websites:

Company Market Value Beta P/S Ratio Zillow 4257.46 M 1.17 15.91 Trulia 1661 M 1.77 7.77 Move 3.61 LinkedIn 24584.7 M 1.46 13.03 Realogy 1.1

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P/S ratio of Zillow is relatively high compared with Move, Realogy and even Trulia,

all are Internet companies. While the Market Capitalization of Zillow 4257.46M USD,

which is three times larger than Trulia.

(2) Revenue/Cost

Year Ended Revenue/Cost Dec 31, 2006 2007 2008 2009 2010 2011 2012 2013 Revenue 4289 7106 10593 17491 30467 66053 116850 197545

Costs and expenses:

Cost of revenue 1621 3710 4198 4042 4973 10575 14043 18810

Sales and marketing 4676 6118 7481 9654 14996 25725 49105 108891 Technology and 6794 12885 15048 11260 10651 14143 26614 48498 development General and 5148 6179 5770 5501 6684 14613 21291 38295 administrative Total costs and 18239 28892 32497 30457 37304 65056 111053 214494 expenses Income (loss) before -13950 -21786 -21904 -12966 -6837 997 5797 -16949 income taxes Other income 1361 1496 687 111 63 105 142 385 Income (loss) before -12589 -20290 -21217 -12855 -6774 1102 5939 -16564 income taxes

According to Zillow’s annual report, the company’s losing in 2013 can be explained by large operation, sales and marketing costs. The company made several times of

City University of Hong Kong acquisition in 2013 accompanied by heavily promotion in order to expend Zillow’s largest market share.

So the P/S Ratio of Zillow was keeping rising during the past several years.

We are concerned that the stock price of Zillow has been overestimated.

According to the Acquisition Agreement, Zillow would exchange stock with Trulia with a ratio of 1: 0.44, given that Zillow’s stock price has been overestimated, the price of purchasing would be more than 3.5 Billion. Both Zillow and Trulia have no profit in fiscal year 2013, returns on equity can be calculated easily according to annual reports.

Company Net Income (USD) Shareholder Equity ROE Zillow -12453000 567796000 -2.19% Trulia -4393000 381076000 -1.15%

(3) .A conclusion of this part:

The stock price of Zillow has been overestimated.

City University of Hong Kong a. High P/S Ratio b. High financial investment, high operation cost c. Low Return on Equity -2.2%

The value of Trulia has been underestimated (compared with Zillow)

Low P/S Ratio 7.77

Considering the stock price of Trulia has been underestimated, the capital Zillow spend on acquisition would over $3.6 Billion when the merge close in 2015 if stock price of

Trulia increase as expected, and this situation is good for stockholders of Trulia definitely.

2. Competition

(1). Comparison between Zillow and Trulia

We will argue below that the acquisition can’t solve the problem, but strengthen the problem, so it can’t meet the effect that like 1+1>2

Do some comparison like below: a. Organizational Structure difference

Brief Introduction of the CEO in Zillow:

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Spencer Rascoff is the Chief Executive Officer and a Director of Zillow Inc.

(NASDAQ: Z), the leading real estate information marketplace. Spencer joined the

Vice President of Marketing and served as its Chief Operating Officer from October

2008 through his promotion to CEO in September 2010.

In addition, before his consumer Web career, Spencer was a private equity investor

At TPG Capital, and an investment banker at Goldman Sachs, Bear Stearns and

Allen & Company.

Brief Introduction of the CEO in Trulia:

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He has a strong background in tech and online consumer services and was part of the original launch team for lastminute.com, Europe's largest online travel company

Pete created Trulia with co-founder Sami Inkinen.

The inspiration came when he faced his own challenges researching homes

Education Background

University of Oxford

MA Physics

Differences

Zillow:

Zillow’s CEO: Spencer Rascoff who was major in the economics in Harvard University and worked in the Goldman Sach, is very good at finance, and knows well how to estimate the stock price of the company that will be acquired and lead his company to a way that focus on the governance finance for their consumers.

So, Zillow’s mission is to empower consumers with information and tools to 12

City University of Hong Kong make smart decisions about homes, real estate and mortgages.

Trulia:

Trulia’s CEO Pete Flint graduated from Stanford University,

Majored in MBA, knows well how to collect the marketing information, find opportunities form the market. So Trulia focus more on the giving consumers the

Information they need, helping professionals build their businesses, and creating additional value in adjacent markets.

SO, Trulia focus on transforming the industry in three big ways: giving consumers the information they need, helping professionals build their businesses, and creating additional value in adjacent markets.

Above all, we can say that, although there are some overlap function or departments between Zillow and Trulia, the missions of them are different,

In addition, there is one point we should see that: most people who visit Zillow don’t

want to visit Trulia, and who want to visit Trulia don’t want to visit Zillow. They don’t

have a large overlapping region for the consumers:

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SO, If complete the acquisition, they can complete the integration of customer

resources, so that expand the market influence, decrease the labor cost, promotion

cost and so on.

It seems well, but there still have some problems in the two companies, which are

the disadvantage factors for the acquisition. Just as follow analysis.

b. Operation Modes Differences

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Click into the home pages of Zillow and Trulia, it looks like no significant different function of the two companies, but actually, there are some differences between them.

Just as the follow table shows:

Elements Zillow Trulia

High Technology Yes Yes（not good） Satellite cloud picture Yes No Estimate Yes Yes（not good） Service Quality Good Good So, our observations are summarized below:

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Zillow is good at making use of high technology to better catch the consumers’ attention.

Such as Satellite cloud picture. But in this factor, Trulia didn’t do well as Zillow.

Zillow has a strong estimate system, and even has her own brand-Zestimate. The

Zestimate home value is Zillow's estimated market value for an individual home and is calculated for about 100 million homes nationwide. It is a starting point in determining a home's value and is not an official appraisal, which has a good reorganization. They have a accurate estimate for the house. In contrast, Trulia didn’t do well in this aspect.

Trulia has a good service for the customers in the aspect of neighbor environment information collection; otherwise, Zillow doesn’t do well in this aspect.

Reply email in time, and had good attitude to us.

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SO, If complete the acquisition, they can complete the integration of customer resources, so that expand the market influence, decrease the labor cost, complement each other’s advantages.

Therefore: is it meant the acquisition of the two companies is a good deal?

Absolutely not.

There are some disadvantages for the transaction:

They don’t know what the customers want, which leading to the low trading volume.

We can sea from the picture below, there certainly are so many spots which can link with the housing information, but actually, they are not well classified, you don’t know whether the house is want you want or not before click it, so that when customer visit the website maybe they will feel too general, they don’t know how to start the search.

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Conclusion: Above all, they should classify the houses depend on the consumers’ age, job, and so on, and then make the same kind of houses into one region on the website. So, as they don’t know well what consumers want, what they need, so they have a low trading volume recent years, otherwise, the acquisition can’t solve the problem, but strengthen the problem, so it can’t meet the effect that like 1+1>2

Therefore, we don’t suggest the investors to buy the stocks of the two companies.

(2). Compare with the other competitors

The acquisition can’t make an ideal effect like 1+1>2 a. Online competitor

Elements Zillow Trulia Redfin Access to MLS data No No Yes In House Agents No No Yes 3D Walkthrough No No Yes Business Model Advertising Advertising Discounted Brokerage

We can sea from the table that:

Firstly,

Zillow and Trulia don’t have the Access to MLS data, House Agents, and 3D

Walkthrough, these are the advantages for Redfin compared with Zillow and Trulia

Secondly,

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The difference of Business Model:

Zillow and Trulia: Advertising plays an important role for the company’s profit.

On the other hand: Discounted Brokerage plays an important role for the company’s

profit.

Therefore, above all, is it mean Zillow and Trulia should follow the Redfin’s

Model?

Absolutely not.

The reasons as follows: a. Recent years, Zillow and Trulia had more profit than Redfin. b. Agent costs Refin a lot to do the deals. Redfin has the own agent, which may lead to

a higher proportion of turnover, but it significantly increases their cost. c. Although,Redfin has a 3D walkthrough style to attract customers, it is not most

important, most people in U.S still like the iphone. d. If we compare Zillow with Redfin, we can see that Redfin hired in house agents to

make the deal with consumers. Redfin is a strong competitor who can get revenue

from customer directly. And compared Zillow with Trulia, the two companies are

too similar to each other, Trulia is another rival as well. e. Even Zillow is the largest website in the market right now, we say that every

competitors are trying to expend their market shares that will decrease the market

share of Zillow.

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So, we can say that the acquisition is reasonable since both companies are dying to expend the market share. Otherwise, even combined, does not give them advantage over others. There is insufficient synergistic benefits to justify the acquisition. And we don’t think such acquisition will lead to net profit for both companies. The problem is weak controls of Pricing Power for both Zillow and Trulia. b. Realtors

When we are consider the competitors of Zillow, we cannot only think about similar real estate websites. There are hundreds of realtors and thousands of licensed Real Estate

Agents existed in America. Both Zillow and brokers want to attract potential buyers, the different is that real estate brokers charge buyers commissions and Zillow attract visitors to the website and charge agents for display and marketplace.

That means Zillow relies on real estate brokers to make the deal on one hand, but on the other hand Zillow charges brokers for advertising, what’s more, the fees for display are increasing year by year. The agents would not be happy with this.

Then what about the customers?

We can see from the figures supplied by Bloomberg:

Most consumers prefer to check the price and choose a good service agent on line- website like Zillow- then go to find the broker make the deal. So real estate brokers have greater pricing power than Zillow, since consumers choose brokers to make the purchase not Zillow.

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Zillow want to charge these brokers for more advertising fees, it may need to do something indeed

Therefore, there still exist many problems:

Zillow can accurately estimate the value of the house, but both Zillow and Trulia don’t have the final Price Definition power, as one of the most important incomes for Zillow and Trulia are the agents’ advertisement fees, they have a corporate relationship with agents, so, usually, agents have the price definition power.

Above all, although Zillow and Trulia knew having their own agent is very important, but it cost too much, not fit them; so ,they have only one way to go: acquisition.

But Zillow and Trulia themselves have a lot of problems, so I think

Acquisition can’t solve the fundamental problems and it is also not wise to buy the stock of the two companies.

In my opinion, firstly, Zillow and Trulia maybe should think about how to Get the final Price Definition Power. Maybe the acquisition is just the first Step.

3. Anti-trust issue

Besides the first two potential problems or the obstacles which will turn the acquisition into a lousy result. Anti-trust law, one of the most powerful basic regulations for such acquisition, will forbid this acquisition because such acquisition will be "anti-anti-trust".

Based on the content of Antitrust Law and Herfindahl-Hirschman Index (HHI) we doubt

City University of Hong Kong that this acquisition intends to lessen competition and harm consumers.

Zillow and Trulia are the two largest real estate e-business in the U.S.In the statistics, we can see Zillow's and Tulia’s market share will reach 61% if the acquisition becomes true.

Such a percentage of marketing share will definitely trigger the monopoly. Also, if the

61% cannot convince investors the potential harm from acquisition, evidence or opposition can be found from Applied Mergers Acquisition.

As the horizontal merger, which occurs among peer competitors in an industry,

Herfindahl-Hirschman Index (HHI) is a measure of concentration estimated as the sum of the squares of the market shares of the players in the relevant market. Specifically speaking, the rules say that "HHI greater than 1,800. This is viewed as highly concentrated. Mergers yielding this level of concentration and/or producing a change of

50 points or higher are likely to be challenged, subject to an assessment of the likelihood of coordinated or unilateral actions."

So for Zillow and Trulia, the HHI for their future acquisition could higher than 1800

HHI. Without any pressure from foreign competition which was the strong support for acquisition of Boeing-McDonnell Douglas even though the HHI in that case was also much higher than 1800, could Zillow and Trulia have enough fortune to conquer the

Antitrust Law? Just as the Anti-trust Law said "A horizontal merger eliminates a competitor, and may change the competitive environment so that the remaining firms could or could more easily coordinate on price, output, capacity, or other dimension of competition." Also, "In either case, consumers may face higher prices, lower quality, reduced service, or fewer choices as a result of the merger."

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Thus it is reasonable to raise the doubt--can the two largest corporations finally finish acquisition?

Part III What if the Acquisition Fail?

Consider the potential risk of anti-trust issue and other contingency, the acquisition may fall into failure, the situation under this circumstance needs to be analyzed.

1. Price War

When the acquisition fails, what should Zillow and Trulia do? Obviously, based on the acquisitions Zillow finished in the past two years, we can safely draw the conclusion that such cooperation does want to expand its business scope. So the possible failure of this acquisition might not stop Zillow's step of expansion. So the only left way for

Zillow's expansion is to invade the business field where Trulia has already run maturely.

So does Trulia, if it has the same goal in its future development.

Such invasion will definitely weaken the product differentiation between Zillow and

Trulia. As a result, the two competitive companies will price war to defend their market share. The price war is so common in E-business field. Here's the example of Chinese E- business. The two taxi-hailing apps appeared in China in 2013. Due to the capital support, the market of taxi-hailing apps quickly become oligopoly. So the players cut their prices in order to win their market share. But the result was not as ideal as they expected. Both apps were abandoned by consumers after the two exhausted their cash flows and returned the price as beginning. Thus we can predict if Zillow and Trulia start the price war, they will both be stuck into the dilemma of cash flow. Frankly speaking,

City University of Hong Kong with the serious gap in its cash flow, Zillow is like a Snake Xenzia and you do not know when this snake will bite its own tail. When the biting happens, the oligopoly in real estate E-business will be crashed into pieces and that might not be a bad result for both

E-business companies and consumers.

2. Another mode of cooperation

Since both Zillow and Trulia may avoid a price war if the acquisition failed, they may seek other kind of cooperation. So the second possible situation which may occur is that

Zillow and Trulia both focus on different areas of real estate information providing market. In a near future, Zillow may maintain developing on Zestimate which is providing accurate house prices information and Trulia may still focus on housing information integration. But a long-term competition is unavoidable.

Base on the awareness that Zillow has a larger market share and a higher market capitalization, we can forecast that Zillow is more fixable in shifting operation strategy to win the competition with Trulia.

Part IV

Conclusion

Back to the case.

Firstly, above all the problems between both the companies that we reminded, 24

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As a conclusion we want to say that if the acquisition success in 2015 as expected, the stockholders of Trulia can be the bigger winner since the underestimated stock price of

Trulia would increase and also capitalization of stockholders of Trulia.

In addition, depends on all the problems we analyzed, because of the operation problems exist in the two companies such as lack of the price definition power, don’t know what the consumers really need, so the acquisition is just a simple combination of the two companies, it can’t help them to really solve the problems exist in them, therefore, after the acquisition, they can’t get more profit as they expected, it is also mean that:

Zillow + Trulia > 1 can’t complete.

So, we still can’t recommend investors to hold the stock of the new combined company .

If the acquisition failed to close in contingency, Trulia may suffer more lost, while the situation of Zillow will not be improved significantly if no change to be made in earning capacity.