It has been about two weeks since there was speculation that Groupon Inc. (NASDAQ: GRPN) would merge with Yelp Inc. (NYSE: YELP). One problem here is that Groupon has a market cap of $1.5 billion, despite a mere $2.75 or so share price. Yelp’s market cap is about $2.6 billion.

With a deal of this sort, to buy up almost certainly would require more than just a massive further dilution, and that means adding a big chunk of debt. Wall Street and Main Street probably will not reward a company for leveraging up over a deal that might come with overly difficult integration costs.

Many mergers, particularly when rumors abound, come with potential plot twists. There actually may be a strong and better suitor out there, but for one company or both?

One factor that makes things very difficult to accomplish here is that Groupon is down about 85% from its 2011 post-IPO peak, while Yelp is down by about two-thirds from its 2014 peak. This means there is a tail of disappointed long-term shareholders. Also, Groupon is based in Chicago and Yelp is based in San Francisco.

Zacks put a downward view on the likelihood of a merger two weeks ago, and Wedbush Securities has now keyed in on the potentiality. The firm’s Ygal Arounian has only Neutral ratings on these stocks, and while he sees benefits, there are also some risks. The Wedbush report said:

We see a potential merger of Groupon and Yelp as a strategically sound move that would create a unique local advertising company with strength at the top of the funnel through content, and bottom of the funnel through transactions. We see both revenue and cost synergies with the combined companies that we think create a company where the sum is greater than the individual parts. We believe Groupon and Yelp complement each other very effectively, better position the company to compete in the digital advertising landscape, better compete with Google, and create a more seamless and valuable consumer proposition. We don’t necessarily think a deal is imminent, and we think Yelp will rebuff a takeover attempt by Groupon, at least initially. We therefore don’t change our Neutral ratings on either Yelp or Groupon shares at the moment, and there are no changes to our estimates either. We would revisit this analysis and our ratings in the event an acquisition/merger was announced.

On the bright side, Wedbush’s view is that the combined companies could generate around $400 million in revenue synergies (10% incrementally combined) and about $400 million in operating synergies, versus the firm’s 2021 estimates. The current combined EBITDA estimates for Groupon and Yelp are $667 million, and 2021 EBITDA of a combined company could be approximately $1 billion (or $1.4 billion in a best-case scenario).

As far as how a deal might actually work out, Wedbush would expect a split deal between cash and stock with close to a 43% premium for Yelp ($50 per share). Arounian outlined how IAC/InterActiveCorp (NASDAQ: IAC) and its $18 billion market cap and better long-term operating history would be far better at executing this sort of a deal. His report said:

We think the best-case scenario would be for this deal to be done through a more trusted operator by investors, and in our view, IAC is currently a perfect fit to make this work. We see the possible upcoming spin-off of Match and or ANGI Homeservices as freeing intellectual capital and space within the corporate structure. But this combination comes down to marrying Yelp’s top of funnel expertise with Groupon’s transactional expertise. It makes inherent sense to us to add the review/content strengths of Yelp with the transaction nature of Groupon, an element Yelp has failed to capitalize on so far.

As for the Neutral ratings on a standalone basis, Wedbush noted that the integration would not be an automatic home run, while coming with its own set of challenges. Groupon is already in the midst of its own product transformation while it has seen customer losses and experienced a decline in revenues. Trying to add on Yelp’s slower growth than in prior years with more competition adds a serious hurdle.

Yelp shares were last seen trading at $35.02, in a 52-week range of $29.33 to $50.33. Its consensus price target from Refinitiv is $39.43.

Groupon shares traded at $2.73, with a 52-week range of $2.31 to $4.00 and a consensus analyst target of $3.70.

IAC/InterActiveCorp traded at $222.50 a share, with an $18.7 billion market cap. Its 52-week range is $158.29 to $268.72, and its consensus target price is $299.80.

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