Every month or so, I queue up my “mergers and acquisition targets” set of filters to create a watchlist of doable shares. I did simply that at present, yielding a listing of 34 shares. The finest acquisition targets are typically tech shares, a minimum of when it comes to prevalence (learn: growing the likelihood that your inventory choose turns into acquired):
And I thus minimize the record to solely tech shares, leaving me with a watchlist of six. Yext (NYSE:YEXT) was on that record. But what’s most attention-grabbing to me is that the newest article on Yext right here at Seeking Alpha can also be suggesting Yext to be ripe for a takeover.
Author Gary Alexander arrived at his conclusion in a completely completely different means than I. His perspective is solely one in all enterprise. Mine was extra statistical in nature. Yet we arrived on the identical thesis, which tells me that we’re in all probability onto one thing.
Today, I wish to give a extra quant-side justification for the opportunity of an acquisition of Yext. You can use this text at the side of Gary Alexander’s in figuring out whether or not you assume holding YEXT as a kurtosis takeover commerce is well worth the danger.
I used statistical findings in acquisition analysis to get my shortlist of potential takeover targets. Research on the topic has proven that companies of sure traits usually tend to be acquired, traits together with a excessive money/asset ratio, low price-to-book, and adverse earnings. YEXT appeared for the same causes, equivalent to having a price-to-book of round common for acquisition targets (4.3 vs. 5), having a excessive gross sales progress (32% over the previous 5 years), and having no debt.
Once a inventory meets the monetary standards, we are able to then take into account whether or not the corporate is suited to be acquired as per the favored acquisition methods. For instance, companies which can be extremely overvalued have a tendency to not be common acquisition targets as a consequence of administration not wanting to appear that they overpaid. Acquisition targets additionally want to offer both synergy or diversification to the buying agency. More on acquisition necessities will be learn in Professor Damodaran‘s paper on the topic.
In any case, Yext is nice on these factors. Its price-to-book valuation places it on the software program trade common and thus not overvalued.
Moreover, the enterprise itself lends itself to main synergies. Yext started as a platform that solved an issue for native enterprise who needed to handle a number of completely different native advertising and marketing platforms within the rising social media ecosystem. As a paid resolution, Yext permits enterprise to push updates throughout all the foremost native advertising and marketing platforms, equivalent to Google Maps, Yelp, and Yahoo. In this manner, a enterprise can, as an illustration, change its enterprise hours and supply new coupons by way of these platforms in a single step as an alternative of getting to replace every platform individually. These days, Yext is transitioning into machine studying search. The target market remains to be the identical: Businesses who want to leverage expertise as a means of simplifying the advertising and marketing course of.
The most evident synergy is that Yext has entry to a big buyer base of native companies. Any firm who has an identical shopper base may leverage a Yext acquisition for a right away enhance in leads and advertising and marketing combine. Or, equally, any of the platforms that Yext makes use of may purchase Yext and provides most well-liked standing to that platform, whether or not that be by way of advertising and marketing (explaining why the chosen platform is superior), particular provides, and even by eradicating opponents from the Yext platform. For instance, ought to Meta Platforms (FB) purchase Yext, it may start providing Yext customers particular provides for Facebook advertisements – and solely Facebook advertisements, versus different native promoting platforms – thereby turning Yext purchasers into Yext and Facebook Ads purchasers.
The undeniable fact that Yext’s market cap is below $1B makes almost each such platform a possible purchaser. Even Yelp (YELP), with its $2.5B market cap has sufficient fairness (and no debt) to justify the acquisition. Of course, for an organization equivalent to Apple (AAPL) or Amazon (AMZN), the acquisition of YEXT would have an inconsequential impression on the corporate’s steadiness sheet.
This month, YEXT hit its all-time low.
Almost instantly after, we noticed a surge of insider shopping for. This occurred after an entire yr of zero shopping for motion and a few insider promoting.
This occurred on no vital constructive information, by the best way. The most up-to-date earnings report was not very optimistic, a minimum of in response to my monetary lexical evaluation of the earnings name (extra on this methodology right here). Choice quotes comply with.
“We have seen fragmentation in our interactions with customers and our ability to deliver premium service and support. This impacts customer satisfaction and challenges our retention and upsell motions. In hindsight, it is clear we were too focused on building sales capacity and not focused enough on other functions that drive productivity, particularly sales enablement, training, client success and services.”
(With regard to customer-facing occasions) “Between December and January, we lost more than half of those events, simply because we couldn’t do them… But certainly, when we exited Q3, we didn’t expect to see that kind of disruption and it absolutely affected bookings.”
“Where we’re really challenged and continue to be challenged is on the upsell. And I think that sort of plays into a lot of what Mike has been talking about, about sales productivity and continuing to refine the go-to-market approach.”
The CFO is leaving, too, which isn’t often a cause to purchase inventory. While insider shopping for sometimes is an effective predictor of extra returns, it does not essentially imply that one thing huge is about to occur. However, it definitely does enhance the likelihood that insiders are holding non-public data that’s good for the agency.
Trade Idea and Risks
I feel the dangers are fairly apparent: There may very well be no buyout, Yext continues to spin its wheels with out constructive earnings, and the inventory returns to downward momentum. In a means, this commerce thought is a contrarian one. We see Yext as an excellent buyout goal from each a statistical (supported by monetary knowledge) and basic (supported by synergistic properties) perspective, thus making an extended YEXT place a kurtosis commerce. That is, as a result of potential payoff that comes with an acquisition, the dangers are mitigated.
If we assume that the inventory’s momentum is downward barring an acquisition, we are able to create an choices technique that’s almost risk-free. The thought is to promote in-the-money calls to finance at-the-money or out-of-the-money calls. This technique permits you to revenue if YEXT skyrockets as a consequence of being acquired and in addition if YEXT continues to unload. A loss is simply realized if YEXT consolidates (traits sideways).
Here is my thought:
- Sell 1x May20 $5 name
- Buy 5x May20 $7.50 calls
At the time of writing, the brief calls promote for $200 every, whereas the lengthy calls commerce at $35 every, that means you’ll be able to open this commerce at a internet premium of $25. Thus, within the draw back route, you’ll be able to revenue from the premium, whereas the upside route offers you the equal of holding lengthy 400 shares of YEXT. Essentially, you’re financing an extended place by promoting the in-the-money name. The most danger here’s a $225 loss, which happens if YEXT is buying and selling at precisely $7.50 by May 20.
Let me know what you consider this technique within the feedback part under.