ZILLOW – TRULIA MERGER
The Economist’s Case Study Challenge
SDA BOCCONI MBA TEAM
MATTEO COLOMBO
TATIANA ZAKHAROVA
ATHINA PAPAIOANNOU
SDA BOCCONI SCHOOL OF MANAGEMENT
Contents
Executive Summary ........................................................................................................................... 2
Introduction ........................................................................................................................................ 3
Business model of Zillow and Trulia ............................................................................................ 3
Industry overview ........................................................................................................................... 4
Question 1: Which company is getting a better deal and why? ..................................................... 5
Question 2: Does the structure of the deal make sense for each company? ................................. 7
Question 3: What will the futures likely to be for each company on a standalone basis if
transaction fails to close? ................................................................................................................... 8
Question 4: Based on the companies’ present combined market valuations, what assumptions
about their future would you have to make in order to buy stock in the combined company? 11
Question 5: What trades, if any, would you recommend around this transaction and why?... 13
Appendix 1 ........................................................................................................................................ 14
Appendix 2 ........................................................................................................................................ 15
1
Executive Summary
By mergering Zillow and Trulia, home sellers and real estate professionals will benefit from free
distribution of listings across even more platforms to reach a larger audience of consumers. Zillow
has more competitive advantages than Trulia in the transaction: it gains access to 74,000 paying
customers and a strong consumer brand with 51,6 mln of monthly unique visitors, as well as access
to the existing technical and marketing resources of Trulia. Trulia has taken the majority of the risks
in case the merger agreement is not successful. We expect that both companies on a standalone
basis will suffer from increasing competition in the online real estate marketplace, rapid change in
technologies and increasing dependence on large advertising budgets. The success of the merger
will depend on the ability of the companies to consolidate and expand their market share, the
improvement of the conversion rate of customers and exploitation of cost synergies. We
recommend a Buy position on Zillow and a Hold position for Trulia.
2
Introduction
Business model of Zillow and Trulia
Zillow and Trulia follow very similar business models. They act as a real estate and home-related
information marketplace both through the mobile and Web interface serving homeowners, home
buyers, sellers, renters, real estate professionals, and lenders of all types.
To attract customers the companies employ different brands and products aimed to help people find
vital information about homes, rent, mortgages, rebuilding and connection with local professionals.
Zillow’s portfolio of brands includes Zillow.com, Zillow Mortgage Marketplace, Zillow Rentals,
Zillow Digs and Zillow Mobile. Trulia offers 15 mobile apps across multiple platforms. Zillow
highlights on its website that it is able to present homes not yet on the market. Trulia gives the user
the ability to learn about agents, neighbourhoods, schools, crime, and commute times. The database
is central to the value the companies provide to consumers and real estate professionals. Thus,
Zillow and Trulia are in the business of acquisition of current and accurate real estate listing data
from various third parties, including real estate listing aggregators, multiple listing services, real
estate brokerages, apartment management companies, and other third parties. By mergering Zillow
and Trulia, home sellers and their agents, brokerages, and participating multiple listing services
(MLSs) will benefit from seamless free distribution of listings across even more platforms to reach
an even larger audience of consumers.
Both Zillow and Trulia are primarily media companies, generating the majority of revenue through
sale of advertising products and services for real estate, rental, mortgage and home improvement
professionals. Neither company has anything to do with buying and selling homes.
3
Industry overview
In the past, home buyers relied heavily on newspapers and newsstand real estate magazines to get
their home search started. Today, only 9% of prospective buyers, when polled by the National
Association of Realtors, responded that they would utilize newspaper ads and only 6% said they
would use the home books and magazines available at the newsstand, while 90% go online to
search for a house. Moreover the research showed that even the home buyers using agents still use
the Internet to supplement their home search. The majority of home buyers are still using real estate
agents, but they're utilizing online sources to conduct research and look for homes first.
Real estate agents have reacted well to the increased online presence in their business, getting more
involved with technology to meet changing consumer habits. However the market for residential
real estate transactions and home-related services is highly fragmented and local. Real estate
professionals are still heavily relying on local newspapers, television, magazines, and
home/apartment guide publications to advertise their qualifications or listings.
The success in the industry depends on how fast advertising dollars migrate online from traditional
broadcast and print media. In accordance with expert estimations, real estate professionals spend
$12 billion on marketing their services each year. We estimated that the combined revenue of
Zillow and Trulia for 2014 will represent only 5% of total advertising budgets of real estate agents
(see chart 1 in appendix 1 for the calculation of estimated revenues for 2014).
4
Question 1: Which company is getting a better deal and why?
Zillow and Trulia are the top two online real estate companies in the US. While operating very
similar business models and closely following each other through the various development stages,
the two companies showed different results in terms of financial performance.
Zillow’s revenue for 2013 amounted to $198 mln in comparison with $144 mln of Trulia (see chart
1 in appendix 1). Although both companies had a very close number of paying customers (see chart
2 in appendix 1), Zillow is able to extract more value from its advertisers who payed, in Q2 of 2014,
$320 of average monthly revenue per agent in comparison with $206 of Trulia. This helps to
explain a compound annual revenue growth of 62,8% over the last 6 years for Zillow. Trulia on the
other hand, has been weaker in terms of revenue growth. However, acquisition of a Market Leader
in 2013 helped to boost revenues by almost 110% in 2013 in comparison with 2012. As a result
Trulia overtook Zillow in the number of paying customers in 2013.
In our opinion, Zillow will have more competitive advantages than Trulia in completing the
transaction. In an industry where revenue growth is determined by the ability to acquire real estate
professionals and convert them into paying customers, Zillow will gain access to almost 74,000
paying customers and a strong consumer brand with 51,6 mln of monthly unique visitors by the end
of Q2 of 2014 across websites and mobile devices (see chart 2 and 3 in appendix 1). With limited
consumer overlap the newly formed Zillow will have more market share and significant
opportunities for scale. In acquiring more unique users, the web space owned by each company has
more leverage to demand higher advertising fees, which increases future revenue growth.
Future value creation highly depends on the ability to expand the platform beyond advertising
services for real estate professionals by developing additional marketing and business technology
solutions to help those professionals manage and grow their businesses and personal brands. Zillow
enhances its technological and marketing competencies by acquiring companies and integrating
them: during the period from 2011 to 2014 Zillow acquired seven companies. The deal allows
5
Zillow not only to gain access to the existing technical and marketing resources of Trulia, but also
significantly strengthens Zillow’s competencies and capabilities required for product and business
development in the future, while being able to integrate Trulia quickly and efficiently.
Finally, the combined company will be managed by the existing Zillow CEO, Spencer Rascoff.
Even if both brands will be kept and Trulia CEO, Pete Flint, will remain in his chair, the decisionmaking power of Trulia will be reduced and the strategic objectives and future development of the
company will be mainly determined by Zillow’s top management.
The legal structure of the deal also gives Zillow a strong competitive advantage, compared to
Trulia, allowing the company to significantly reduce its own risks if the merger fails on antitrust
grounds. Please refer to question 2 for more details.
6
Question 2: Does the structure of the deal make sense for each company?
On July 28, 2014, Zillow announced that it has entered into a definitive agreement to acquire Trulia
for $3.5 billion in a stock-for-stock transaction. As part of the agreement, Trulia shareholders will
receive 0.444 shares of Class A Common Stock of Zillow for each share of Trulia, and will own
approximately 33% of the combined company at closing. Current Zillow holders of Class A
Common Stock and Class B Common Stock will receive one comparable share of the combined
company at closing, and will represent approximately 67% of the combined company. The value of
the deal represents a premium of 30% to Trulia's closing price on July 25, 2014.
The merger is subject to the satisfaction of customary closing conditions, including the expiration of
U.S. antitrust waiting periods and shareholder approval of both companies.
In our opinion, Trulia has taken the majority of the risks in case the merger agreement is not
successful. First of all, the acquisition agreement can stay in effect till January 28, 2016 (almost 18
month after the announcement). Trulia can not make acquisitions, capital expenditures or borrow
money without Zillow’s approval. Trulia cannot enter into an employment agreement involving
compensation higher than $275,000, and cannot begin any intellectual property actions. Secondly, if
the authorities disagree and impose any type of restriction on the deal, even minor restrictions,
Zillow can walk away and pay a $150 million termination fee. It is highly uncertain whether this
amount would compensate Trulia for the time and expense of being left to wait for up to 18 months.
In addition to what has been stated above, we assume that Zillow’s stock was overvalued.
Consequently, they may have a greater incentive to make a stock-for-stock transaction and use the
overvalued equity to purchase Trulia’s assets at an effective discount. In reality, the stock price of
Zillow fell by 7% the day after the announcement and lost around 50% of its value in the 3 month
period after the announcement.
7
Question 3: What will the futures likely to be for each company on a standalone
basis if transaction fails to close?
The business prospects of Zillow and Trulia on a standalone basis are highly depending on the
following:

the ability to attract real estate professionals and convert them into paying subscribers. The
current market penetration of the companies is low. Trulia reported that it was able to attract
669 thousand real estate professionals out of a total 2,8 million in the US as of 30 June 2014.
However, only 11% of these active customers are paying for their subscription. In a highly
fragmented and highly competitive market both companies will continue to struggle with the
number of real estate professionals subscribing to their products. Moreover, it is highly unlikely
that the companies on a standalone basis will be able to significantly increase their revenues
from advertisers. Although Zillow is able to extract more value from its customers and charge
$320 of monthly average revenue per agent, this number was increased by only 55% in a 2,5
year period from Q1 2011 to Q2 2014. So, we expect lower revenue growth for both companies
in the nearest future. The companies may seek to compensate their subscription-based revenue
by other marketplace revenue. We have acknowledged that a share of Zillow’s revenue from its
Premier Agent advertisers decreased from 92% of total marketplace revenue in 2011 to 86% in
6 months of 2014 (see table 1 in appendix 2). However, the decrease of subscription-based
revenue will lead to greater volatility of revenues and higher risks for investors.

brand awareness among consumers and real estate professionals and the ability to attract home
owners using websites and mobile applications with moderate spending on development,
marketing and hiring of new employees. Zillow increased its sales and marketing expenses by
122% in 2013 in comparison with 2012 and Trulia by 111% for the same period (see table 1 in
appendix 2). Both companies currently spend more than 50% of their revenues on advertising
and marketing. Increasing competition in the industry will require even heavier adverting
8
budgets that, considering the possibility of stabilized revenues, will further undermine the
ability of both companies to turn a profit.
Currently Trulia seems much weaker in terms of financial performance and the ability to generate
and sustain revenue growth compared with Zillow. The company's weaknesses can be seen in
multiple areas, such as its increasing net operating loss, losing momentum in organic revenue
growth and difficulty in increasing average revenue per subscriber, inability to effectively integrate
acquired business of Market Leader. Growth rates of monthly unique visitors has decreased on a
year-over-year basis from 52% in Q1 2013 to 37% in Q1 2014 meaning that increasing marketing
and advertising expenses doesnt generate additional consumer traffic. Future business growth
depends also on the ability to attract financing. In December 2013 Trulia issued $230.0 million
aggregate principal amount of 2.75% Convertible Senior Notes, due in 2020. Trulia doesn’t have
experience of seasonal offerings. Taken into consideration the financial situation of the company
described above its ability to raise funds on equity or capital markets in the future is highly
questionable. Moreover, a failed merger with Zillow will negatively affect the business of Trulia, its
operating results and image.
Zillow seems to have a more robust marketplace platform that enabled the company to grow its
business more quickly and efficiently over the last years. It demonstrated the ability to seize
strategic opportunities, including expansion of business into adjacent markets, such as rentals and
mortgages, commercial relationships and acquisitions. In February 2011, Zillow launched a
strategic relationship with Yahoo! Real Estate. During the period from 2011 to 2014 Zillow
acquired seven companies. Zillow also has an ability to secure funds to finance its growth and
acquisitions. Being a debt free company, Zillow went twice to the market for the seasonal offerings
after the IPO in 2011. However, as for Trulia, we foresee difficulties the company will need to face
in providing sustainable growth of revenues and improving operating efficiency. The revenue
growth is still high but flat at an average year-over-year level of 70% during the last four quarters.
9
This is maily due to the decreasing growth rate of paying subscribers: 46% in Q2 of 2014 on yearover-year basis in comparison with 71% in Q2 of 2013. Heavy marketing expenses created only
49% of year-over-year growth of monthly unique visitors in Q2 of 2014 and resulted in deteriorated
net operating results in 2013 and in the 6 months in 2014.
To conclude, we expect that both companies on a standalone basis will suffer from increasing
competition in the online real estate marketplace, rapid change in mobile and Internet technologies
and increasing dependence on large advertising budgets. This may lead to decrease of market share
of each of the companies, weakening of their brands, inability to create value for advertisers and
deteriorating of financial results.
10
Question 4: Based on the companies’ present combined market valuations, what
assumptions about their future would you have to make in order to buy stock in
the combined company?
Assuming the regulator allows the merger, in order to invest in the combined company we need to
assume that there is real value creation from the transaction and not simply an extraction of value
from one side against the other. Considering the high similarity of the two companies’ business
models, we expect that the integration will be strong on everything that the final user does not see
but also soft and “consensus driven” to keep Trulia’s core competencies which lie in its people.
Considering the revenue side of merger, investors are willing to buy the stock if the compounded
average revenue growth rate is at least equal to or higher in the last 3 years, 44% for Zillow and
55% for Trulia (50% considering only organic growth). Typically, in the early stage of high-tech
young fast growing companies the revenue growth and their projections are the key drivers of value.
The market growth is highly correlated to both the speed the advertisers will move from traditional
offline advertising to the online one and the overall situation of the real estate market in the US.
While the first trend is reasonably guaranteed by the inexorably increase in connected users, we
need to assume that the real estate market in the US will continue to stably improve guaranteeing
high demand and high supply, without enhancing a new housing bubble.
More specifically, the revenue growth drivers are the increasing unique visitors population, which
attracts real estate agent advertisers as paying subscribers. Given the trends stated above, while the
market will grow constantly, the market share improvement should be critical for the new entity in
order to prevent easy entrance of new players or the growth of the smaller existing ones. If the
regulator will not introduce limitations to the freedom of the Zillow & Trulia merger we assume
that they will succeed in consolidating and expanding their market share, locking in their existing
paying customers. The improvements in conversion rate of customers into paying subscribers are
11
achieved under the assumption that Trulia’s marketing and customer focus capabilities are shared
with Zillow and that the combined marketing budget is exploited more efficiently.
In the short term the absorption of Trulia’s brand into Zillow’s one could damage their overall
revenues due to the loss of shared visitors and consequently of overlapping paying customers.
On the costs side, we should assume that the 100 USD Mil savings declared are actually achieved
through optimized advisement budgets, economies of scale in managing a higher number of MLS
and continuous technology and service development synergies.
As investors we would bet on the future of the merger if we assume that the current fragmented
market will consolidate following Zillow’s example in order to increase the customer base and the
bargaining power with subscribers but also optimising their pricing strategy. Thus, Zillow will gain
a first mover competitive advantage.
12
Question 5: What trades, if any, would you recommend around this transaction
and why?
Giving the current status of the transaction and the analysis above, we believe that the consolidation
is the natural evolution of the market and thus there is a good chance that the regulator will approve
the transaction. Indeed new incumbents from the high-tech industry are close to entering the market,
for example Google, with service for real estate professionals leveraging its leadership in internet
usage and customer data acquisition.
In conclusion we would recommend a Buy position on Zillow because they retain a better position
in the deal to capture the synergies while having limited exposure to risks related to authority and
transaction structure which are run mostly by Trulia. Following this consideration we would
recommend a Hold position for Trulia which reflects a positive position about the merger but also
considers their additional exposure to the potentially weaker part of the deal.
13
Appendix 1
Chart 1: Revenues for 2008 – 2014*, in million of US dollars
333,3
Zillow
CAGR ’08-’13: 62,8%
272,7
CAGR ’11-’13: 44.0%
197,5
Trulia
CAGR ’08-’13: 61,5%
CAGR ’11-’13: 55,1%
143,7
116,9
66,1
10,6 8,1
17,5 10,3
30,5 19,8
2008
2009
2010
68,1
38,5
2011
Zillow
2012
2013
2014E
Trulia
* The estimated revenues for 2014 was calculated based on revenue for 6 months period ended 30 June 2014 adopting the assumption that in 6 months
ended 31 December 2014 the revenues will increase by 15% due to seasonality of business
Chart 2: Paying subscribers in the period from Q1 of 2011 to Q2 of 2014, in thousand
57
11
13
12
15
15
17
17
27
23
19
16
20
22
23
39
34
29
24
45
28
60
48
67
53
32
q2'11 q3'11 q4'11 q1'12 q2'12 q3'12 q4'12 q1'13 q2'13 q3'13 q4'13 q1'14 q2'14
Zillow
Trulia
Chart 3: Unique monthly visitors in the period from Q1 of 2011 to Q2 of 2014, in million
81
71
47
17
12
21
15
24
17
32
24
16
21
33
24
36
35
25
24
31
54
35
61
41
54
52
43
34
q1'11 q2'11 q3'11 q4'11 q1'12 q2'12 q3'12 q4'12 q1'13 q2'13 q3'13 q4'13 q1'14 q2'14
Zillow
Trulia
14
Appendix 2
Table 1: Composition of revenue and expenses for 2008 – 2013
Zillow
Revenue
Marketplace revenue
% of tot.
of which Subscription-based revenue*
% of marketplace revenue, %
Display revenue
% of tot.
Total costs and expenses
Sales and marketing
% of revenue
Y-t-Y growth, %
Trulia
Revenue
2008
2009
2010
2011
10.593
17.491
30.467
130
1%
3.912
22%
nd
nd
2012
2013
66.053
116.850
197.545
144.918
13.228
43%
42.190
64%
86.670
74%
154.208
78%
116.340
80%
nd
nd
nd
nd
39.003
92%
77.832
90%
132.130
86%
99.992
86%
10.463
99%
13.579
78%
17.239
57%
23.863
36%
30.180
26%
43.337
22%
28.578
20%
32.497
7.481
71%
30.457
9.654
55%
29%
37.304
14.996
49%
55%
65.056
25.725
39%
72%
111.053
49.105
42%
91%
214.494
108.891
55%
122%
162.157
82.973
57%
na
6m 2014
8.066
10.338
19.785
38.518
68.085
143.728
118.575
Marketplace revenue
% of tot.
nd
nd
nd
nd
nd
nd
nd
nd
47.805
70%
113.383
79%
nd
nd
of which Subscription-based revenue*
% of marketplace revenue, %
nd
nd
nd
nd
nd
nd
nd
nd
40.196
84%
100.757
89%
nd
nd
Display revenue
% of tot.
nd
nd
nd
nd
nd
nd
nd
nd
20.280
30%
30.345
21%
nd
nd
13.807
5.194
64%
17.355
5.532
54%
7%
23.599
8.638
44%
56%
44.285
17.717
46%
105%
77.604
33.747
50%
90%
167.871
71.370
50%
111%
147.886
70.647
60%
na
Total costs and expenses
Sales and marketing
% of revenue
Y-t-Y growth, %
*subscription-based revenue was calculated by multiplying the number of subscribers by monthly ARPA and by number of months in the period
15