Rocket Companies (RKT -13%) is experiencing a downturn after announcing its acquisition of digital real estate brokerage, Redfin (RDFN, Financial), for $12.50 per share, valuing Redfin at $1.75 billion. Redfin had closed at $5.82, leading to dissatisfaction among Rocket shareholders about the premium and the all-stock nature of the deal.

• Redfin's high online traffic, with nearly 50 million monthly visitors, is a key attraction. Rocket aims to leverage this traffic for cross-selling Rocket Mortgage loans. Redfin employs over 2,200 real estate agents across 42 states and has expanded into a low-commission brokerage model.
• Rocket anticipates significant revenue synergies in search, real estate brokerage, mortgage origination, title, and servicing. The acquisition will enable Rocket to connect homebuyers with real estate agents and loan officers, while enhancing consumer insights using a data repository of 100 million properties to improve AI models.
• The combined company is expected to achieve over $200 million in run-rate synergies by 2027, including $140 million in cost synergies from operational efficiencies and over $60 million in revenue synergies by integrating Redfin's real estate agents with Rocket's financing clients.
• Investors are concerned about acquiring a company exposed to a struggling real estate market. Redfin has reported challenges such as economic uncertainty and unaffordable home prices, leading to increased cancellations of home purchases.
• Zillow (ZG, Financial) has successfully diversified into rentals, benefiting from increased rental demand. Although Redfin has also entered the rental market, it has struggled. Redfin has partnered with Zillow to list rental ads and plans to restructure its rental segment, including laying off 450 employees.

While Rocket can benefit from Redfin's traffic to boost its mortgage and real estate services, Redfin's recent performance, including downside Q1 guidance, raises concerns. The real estate market remains challenging, and Redfin's rental segment has underperformed. Although the idea of creating a mini-Zillow is appealing, improvements are necessary, and the premium paid is substantial.