Yes, Groupon is wildly successful and has huge top-line revenues. Yes, it plugs some holes for Google and provides intriguing new possibilities for the company in terms of business models and local ad sales. But AllThingsD is reporting that the Google offer for the Chicago-based Groupon is $5.3 billion.
That would make it the single largest acquisition in Google’s history by about $2 billion. What is Google smoking?
The model and market dynamics behind and beneath Groupon argue that the company will continue to do well and that the model is sustainable over time — though almost certainly not the growth rates witnessed today.
Next year the market could look quite different than it does today. Groupon is evolving of course (e.g., Groupon Stores) but consumers and SMBs could certainly cool to “daily deals,” though consumers will almost never tire of saving money.
If the AllThingsD information is correct it would show how crazy-fixated Google is on Local, almost to the point of lunacy in offering that amount of money. It does make sense from one point of view however: if Google wants Groupon itself it has to pay a premium because of the company’s valuation and growth trajectory. But there are other companies to buy out there for less money.
If Google wants deals/offers/coupons it could acquire that for much less. If it wants a local sales channel it could build one for much less. It could buy Dex or SuperMedia for much less, or any number of other local channels. If it wants a big consumer email list it could also develop one for much less.
LivingSocial, the “Avis of group buying,” could be acquired for less than half of the proposed Groupon amount and would accomplish most or all of the same objectives for Google. I suspect, however, that Google is fixated on buying the leader in the space, as it did with YouTube. Over time, however, Groupon is likely a less valuable asset than YouTube though it has a clear and immediate revenue stream in a way that YouTube did not.
If we’re hearing rumors like this then the negotiations are very real. The question is whether Groupon wants to take the money and run or whether it sees a potential IPO in its future, where it could make considerably more.
November 30th, 2010 at 1:05 pm
[...] This post was mentioned on Twitter by Greg Sterling and Adam Cooke, tonileppanen. tonileppanen said: RT @gsterling: Five Billion For Groupon? What Is Google Smoking? http://bit.ly/hW45JX [...]
November 30th, 2010 at 3:00 pm
All depends on your long-term outlook for what Groupon is doing. If you believe that users will tire of deals, or that advertisers will start to “wise up” and reject this model, then yes this would be a bust.
Personally, I think that both consumers and advertisers have spoken and are taking to this market in droves. In 2 years Groupon has amassed relationships with tens of millions of consumers and tens of thousands of paying merchants. If the deals model flattens out or gets more competitive, Groupon can offer other local commerce services to these big audiences. Groupon has already shown that they are expanding via deal personalization, self-serve model, etc. Add in CRM, scheduling, and yield mgmt modules and this becomes the local commerce platform of the next decade.
Imo $5-6 billion is pricey but not out of line for a clear market leader, one of the fastest-growing companies in history, in an area of strategic importance both to consumers and advertisers.
Take a comparable like Open Table – also the clear leader in a local commerce/services platform. The public market values OPEN at $1.6 billion on less than $100 mil in revenue and 15,000 total restaurant relationships. They’re growing at a “measly” 40% per year v Groupon’s astronomical growth. Groupon will be 10x their size on most operating metrics in a year or two.
November 30th, 2010 at 3:04 pm
Agree that there’s a potential long term scenario here. And do thing that “deals” will be a key part of the local product mix going forward.
I think Google could do what you’re describing for less.
November 30th, 2010 at 4:57 pm
Don’t confuse this proposed valuation with the deal space. Groupon has a first-mover advantage in “crowd sourcing ecommerce”. That’s not a couple of buzzwords. It’s a phenomenon that needed social media and mobile to mature to become a massive opportunity. Groupon has amassed an audience that will allow it to crowd source any number of opportunities. Think multiple verticals (entertainment, retail, services). Think in-store commerce. How will I direct mobile groupon consumers to the part of my massive retail location where my biggest margin items or excess inventory is? Google is getting an audience, brand, and sales force designed to negotiate massively profitable deals that have everything to do with margin and redemption — something their search algorithm engineers will need to learn from experience.
November 30th, 2010 at 5:01 pm
Josh:
As my multiple posts suggest I get all the assets that Google is getting. My point is that Google could develop the same assets less expensively. Consumers are fickle and so are the SMBs. I don’t think that they necessarily distinguish between Groupon and LivingSocial.
Volume counts, scale counts, etc. Groupon is the leader. As Paul suggested this is a bet on the future. My view is that the future of this space is complex. Groupon would be very powerful provided that Google could execute going forward.
November 30th, 2010 at 6:32 pm
I didn’t mean to suggest your were confused about their assets. I meant don’t confuse this as indicative of a “deal space”. As a first-mover, Groupon is simply a different beast entirely. This position gives them latitude to explore bigger markets, negotiate with mass retailers, and extend into things like online dating — see Grouspawn — with something completely different than Match.com’s subscription/ad model. This isn’t an SMB play — and I believe there is only one first mover. Clones will run very profitable, but much smaller daily deal businesses. They won’t replicate this opportunity.
November 30th, 2010 at 6:55 pm
Josh:
Don’t you think that LivingSocial would be almost as good and half (or less) as expensive? Or what about buying a sales channel from a different source and aggregating deals — not as good but much cheaper.
November 30th, 2010 at 7:05 pm
We can have that exploration offline…speak soon!
December 1st, 2010 at 4:28 pm
@Greg: They could put it together via: buy Living Social for $1B, buy sales reps from another channel for $1B, then offer 2MM merchants worldwide $500 off their first deal as a cust acquisition play for another $1B = $3B.
OTOH that’s a lot of work and if the growth rate is what it is, it may be a no-brainer to dump another few $B into the deal, not to mention the defensive value.
Fun times for local….
April 5th, 2011 at 3:14 pm
[...] November last year I wrote: LivingSocial, the “Avis of group buying,” could be acquired for less than half of the proposed [...]
April 26th, 2011 at 8:56 am
[...] Sterling has written some typically-insightful posts reflecting his view that Google would be significantly overpaying for Groupon at $5.3 [...]