DEF 14 Inc. May 23, 2023
TCS Capital Management, a significant shareholder of Yelp Inc., has delivered an open letter to the Yelp Board of Directors expressing deep concern over the company's underperforming stock and calling for immediate exploration of strategic alternatives. TCS Capital Management, which owns over 4% of Yelp's outstanding shares, believes that Yelp is severely undervalued and suggests that the company could be sold to a strategic or private equity buyer for a substantial premium of at least $70 per share, representing a 120% increase from Yelp's current stock price based on reasonable valuation assumptions. Alternatively, TCS Capital Management proposes that Yelp explores a tax-free merger with Angi Inc. (formerly known as Angie's List) to establish a dominant presence in the $500 billion home services market.
Over the past five years, Yelp's stock has experienced a 30% decline, significantly underperforming the S&P 500 by 98%. Furthermore, Yelp's share price has remained flat over the last decade, lagging behind the S&P 500 by an alarming 208%. TCS Capital Management highlights Yelp's current valuation as remarkably low, with the company trading at only 4.8x forward estimated EBITDA and 8.5x forward estimated cash earnings, despite its strong brand recognition, large user base of 73 million users, and 265 million reviews. The firm emphasizes that Yelp's robust revenue growth, particularly in the home services segment, coupled with its substantial free cash flow and sound balance sheet, further support the argument for the company's undervaluation.
TCS Capital Management identifies several factors contributing to Yelp's poor stock performance. They criticize the complacency of Yelp's co-founder and CEO, Jeremy Stoppelman, who has retained his position for nearly 20 years despite the stock's decline. TCS Capital Management alleges that Stoppelman runs the company as his private domain, even though he owns only 5% of the outstanding shares and lacks special voting rights. The letter further criticizes Yelp's board of directors, describing them as complacent and lacking relevant experience or significant investment in the company. TCS Capital Management accuses senior management of being enriched through outrageously high stock-based compensation, while unaffiliated stockholders suffer losses.
The letter also highlights insider stock sales by Yelp executives, including Stoppelman, totaling approximately $120 million since 2018, without any corresponding share purchases during that period. These sales, coupled with allegations of insider trading and suspiciously timed stock sales, have resulted in securities class action lawsuits against Yelp, leading to settlements totaling over $40 million. TCS Capital Management argues that these actions and settlements demonstrate a lack of governance and accountability at the company.
TCS Capital Management urges Yelp's board to consider strategic action to enhance stockholder value, either through a sale of the company or a merger, such as with ANGI. The firm believes that Yelp would attract significant interest from potential strategic and private equity buyers due to its strong brand, solid growth, predictable cash flow, and potential for margin optimization. They suggest a conservative valuation of $70 per share, offering more than a 120% upside to the current stock price, but note that a higher valuation of $85 per share is also plausible given Yelp's scarcity value.
In conclusion, TCS Capital Management demands that Yelp's board takes immediate action to explore strategic alternatives and maximize value for unaffiliated stockholders. They emphasize their willingness to make a bid themselves if necessary and express their commitment to advocating for the best interests of all stockholders.
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