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ZPG bid highlights appeal of digital platform businesses
Zoopla’s parent company ZPG (ZPG) was an obvious takeover target and we aren’t surprised to see it receive a 490p per share bid from US private equity firm Silver Lake.
Congratulations if you owned its shares before the takeover news was announced. And hopefully you did own them, given that ZPG was one of the six quality stocks we said to buy in the 15 February 2018 issue of Shares following the global market sell-off. We said to snap up the shares at 328.4p, meaning you could have made nearly 50% profit in three months if you followed our suggestion.
Even if you aren’t celebrating, there are still important lessons to be learned from the takeover situation and the importance of other companies with similar characteristics.
MAKING LIFE EASIER
ZPG will be the latest company in Silver Lake’s portfolio that uses technology to make customers’ lives easier.
Over the past three years ZPG has expanded into the utilities switching market through the purchase of uSwitch and also developed broader propositions in the property and financial services market.
Everything was linked by its goal to help consumers make smarter property and household decisions.
It’s no wonder that ZPG tried to buy GoCompare (GOCO) late last year as that would have strengthened its position in financial services, particularly insurance. Although that bid was rejected, there is now speculation that Silver Lake could acquire GoCompare itself and bolt it on to ZPG.
EMBRACING THE DIGITAL CHANNEL
ZPG has been expanding its product lines, holding up well against increased competition in the property portal market and executing its growth plan with considerable success.
Key to its achievements is the use of digital channels to easily reach consumers. That’s also been a real driving force for many other companies on the stock market including Just Eat (JE.), Purplebricks (PURP:AIM) and Rightmove (RMV).
‘The tech platform model is a special kind of beast: utilising the network effect, automation, and operational leverage to push towards the winner taking all in the long run, a process that can be accelerated by M&A,’ says stockbroker Peel Hunt.
‘In the CMA’s decision regarding Just Eat’s acquisition of Hungryhouse, it described how the platforms: “offer consumers the convenience of choosing from a large range of takeaway providers in one place”. Just replace “takeaway” with car dealers, insurance brokers or jobs.’
Peel Hunt says that when you are tapping the same broad set of consumer needs via a marketplace model, scale efficiencies in tech and marketing can easily be made.
Asset manager Lindsell Train believes its best portfolio performers will be companies making a success of a digital transition or where digital is ‘clearly a friend’ to the company. Relevant examples include Euromoney (ERM) and RELX (REL).
Many investors have been put off online platform businesses due to high equity ratings. And we think it is right that there is some scepticism about some of the companies in this market as not everyone will be a long-term winner. For example, Purplebricks is arguably trying to do too much at once and has considerable execution risk.
Yet there is a good argument to suggest some of digital players deserve a premium rating if they have an edge over rivals and the potential to outperform.