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Yelp Seeks Buyer Amid Slow Growth, Rising Costs

Yelp Inc. YELP 6.25 % is exploring a sale as the company at the top of many Internet search results struggles to post strong growth with users and advertisers.

The San Francisco-based site was willing five years ago to go it alone despite an acquisition offer from Google Inc. GOOGL 1.63 % Today, it is working with investment bankers and sounding out potential buyers, people familiar with the matter said.

A deal isn’t imminent, one of the people cautioned, and may not happen at all.

But that willingness itself is a sign of the struggles at a company that has amassed millions of consumer reviews of everything from restaurants to dentists to hair salons.

Yelp is contending with a host of troubles: slowing user growth, rising costs, a return to a quarterly loss and a stock price that has shed more than half its value since its high last year.

It wasn’t long ago that technology executives thought highly specific local searches, reviews and advertising would be a winning formula as Internet use moved to devices like the iPhone.

But Yelp’s stumbles are showing that the slow-changing world of local business is harder to crack than was originally thought.

While Internet users have increasingly searched for restaurants and points of interest in their cities and neighborhoods, Yelp and others have had difficulty turning the small businesses that populate the local economy into paying advertisers, said Sameet Sinha, an analyst at investment bank B. Riley & Co. in San Francisco.

“Small and medium-sized businesses are always fickle with their advertising budgets,” Mr. Sinha said.

It’s also hard to keep mom-and-pop shops returning as advertisers each year.

Mr. Sinha estimates that as many as 70% of Yelp’s advertisers stop buying ads on the site after a year.

Yelp also relies on Google Inc. GOOGL 1.63 % ’s search engine for more than half its online visitors. That reliance has created tension between the two companies over the years, especially as Google has pushed further into its own listings for restaurants and other local points of interest.

Yelp executives have complained that Google has altered its search results, directing users to its own local listings rather than Yelp, and it testified in Congress that such practices are anticompetitive.

A Google spokesman declined to comment.

Unique visitors to Yelp grew to 142.5 million in the first quarter, an increase of 7.5% from the prior year. That was a slowdown compared with the company’s 12.8% growth in the fourth quarter.

Yelp Chief Financial Officer Rob Krolik said in a call with analysts last month that part of that slower growth was “a Google-driven phenomenon, based on their algorithmic changes last year” that mostly affected visits to Yelp’s site outside the U.S.

Now Yelp may be looking to be gobbled up. Investors welcomed the idea. The company had a market capitalization of $ 2.9 billion before The Wall Street Journal reported Yelp’s exploration of a sale, and it ended the day valued at $ 3.4 billion. Its shares closed Thursday up 23% at $ 47.01.

Yelp started in 2004 after former PayPal executives Jeremy Stoppelman and Russ Simmons devised a local website to replace word-of-mouth recommendations. With a $ 1 million investment from PayPal founder Max Levchin, the site quickly spread to new markets and drew a community of contributors who regularly submitted detailed reviews.

Quick expansion allowed the company to trump newspapers and yellow pages as a preferred reference point for Web-savvy shoppers, and it began selling advertising to mom-and-pop businesses.

By 2009, Yelp found itself in talks about a possible takeover by Google for at least $ 500 million, the Journal reported at the time.

The discussions eventually fell apart, and Yelp decided to go it alone, raising more than $ 100 million in an initial public offering in 2012. Google, meanwhile, built out its own platform to display local businesses in its search results.

Most of Yelp’s revenue comes from small businesses that pay to advertise on the site through specially tailored profiles and payments for customer referrals. The company is still struggling to become profitable. It booked a $ 36.5 million profit on $ 377.5 million in revenue in 2014. But it lost $ 1.3 million in the first quarter, returning to red ink after three straight quarters in the black.

Other Internet websites that rely on local business advertising have also stumbled.

Angie’s List, which charges membership fees for access to reviews, had a $ 12 million loss last year after generating $ 315 million in revenue. Groupon last year posted a $ 73 million loss despite having $ 1.63 billion in revenue. Foursquare has tinkered for years with its business model.

Even as it struggles with growth, Yelp could be attractive to a wide range of buyers beyond online-review rivals.

A deep base of reviews can be a valuable asset because they take time to amass. Reviews are magnets for smartphone users, which is valuable to companies seeking mobile growth. Also, a website with a loyal following entices more users to visit the site directly, allowing its owner to avoid paying for search-engine advertising.

Yelp’s stable of consumer reviews could appeal to owners of other websites. TripAdvisor Inc., which said it averaged 340 million visitors in the first quarter, has added five new restaurant sites over the past year.

Priceline Group Inc. last year paid about $ 2.6 billion to buy restaurant booker OpenTable Inc.

—Scott Austin contributed to this article.

Write to Dana Mattioli at, Drew FitzGerald at and Douglas MacMillan at

Corrections & Amplifications:
Russ Simmons was misspelled as Russ Simons in the photo caption on an earlier version of this article. (May 7, 2015) US Business

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