City University of Hong Kong

City University of Hong Kong Team Name: CityUHK Name of Participants: Xiaolin Nie, Xiao Zhang, Chris Chen Name of University: City University of Hong Kong Title: Zillow+Trulia>2? 1 City University of Hong Kong 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 2 City University of Hong Kong 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. 3 City University of Hong Kong 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 4 City University of Hong Kong 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. 5 City University of Hong Kong 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 6 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 7 City University of Hong Kong 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 8 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. 9 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: 10 City University of Hong Kong 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: 11 City University of Hong Kong 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.

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