Google and Groupon: Smart or stupid? | FT Alphaville

Google and Groupon: Smart or stupid?

With its talks to buy the fast-growing US electronic coupon company Groupon for as much as $6bn, Google has analysts wondering whether it’s being very smart or very stupid.

As the FT reports, analysts are sharply divided over “whether a deal would represent a coup for Google, or amount to an overpriced acquisition of a start-up with an unproved business model”.

The talks with Groupon are in the final stages and centre on a relatively complex deal structure that carries a valuation as high as $5bn, according to one person briefed on the terms. Google’s previous biggest purchase was the $3.1bn takeover of DoubleClick three years ago.

If completed, the FT notes, a deal would put the US search group at the forefront of one of the “hottest new areas of online marketing” and give it an edge in its rapidly expanding rivalry with Facebook.

All very well. But, as some critics note, the Groupon business model is at best, unproven. At worst, in the words of one lawyer who works on Silicon Valley deals, it’s a “dog of a deal that could be the new Skype”, meaning Ebay’s ill-fated purchase of the popular but unprofitable online communications business (which Lex refers to as “one of the dumber deals to come out of techland”).

Even though Groupon is regarded as a big success in social online retailing, as The Economist outlined in September, it’s hard to see how profits could expand exponentially in future.

As the FT’s John Gapper notes on his blog:

I am struggling to believe in Groupon, which Google is reported to be considering buying for $5.3bn, making it the company’s largest acquisition. Despite Groupon having some social media trappings, and being profitable, it feels oddly old-fashioned.

Stone Street Advisors goes further, noting on Business Insider:

…the odds of Groupon continuing that tremendous growth – as a stand alone company or rolled-up into a larger, more established firm with synergistic opportunities – are slim, especially considering measurement firm Quantcast shows that the firm’s popularity peaked around the end of summer and has since dropped-off substantially.

DealBook, however, cites an individual close to Groupon saying the company’s annual revenue is running in excess of $1bn and that its subscriber base tripled this summer to 35m users.

And, it adds, an analyst at Barclays Capital, Douglas Anmuth, estimated in a research report issued on Tuesday that sales could hit $1.5bn in 2011. So, concludes DealBook:

At those levels, Google would be paying four times next year’s revenues. In contrast, the company paid $3.1 billion, or roughly 10 times sales, for DoubleClick in 2007. It bought YouTube for $1.65 billion in 2006, when the online video hub was making less than $11 million a year, according to a company filing.

Not everyone is so relaxed about the deal. Jefferies is worried about Groupon close links to Facebook and potential regulatory issues.

A significant part of the social media draw of Groupon comes from using Facebook Connect to get friends into group buying discounts. However, given the reluctance of Facebook to share user data with Google, the Facebook Connect feature may end up becoming a contentious issue. In fact, Groupon may face its biggest competition yet from the new Facebook “Deals”, which with “Places” can put local offerings on a smartphone based on location.

• Major anti-trust hurdle ahead. The government is likely to take a very close look at this deal, to make sure that Google does not abuse its position in search to dominate this nascent segment. We peg this deal’s regulatory approval at 50/50.

• Low barriers to entry/little customer loyalty. Unlike prior Google deals, this acquisition brings very little in way of technology. Except for the company’s first mover advantage and strong brand, we find the barriers to entry to the Groupon model to be low. Given zero switching cost, dozens of me-too models have sprung up WW.

Regardless of the extent that Google might — or might not — benefit from the deal, there are some clear winners out there, notes Business Insider. If the deal comes off, there will be some very rich founders, employees and investors in Groupon. After all, the start-up was valued at $1.35bn at its last funding round seven months ago.

If the price talk on the Google deal is to be believed, adds Stone Street, “that’s a pretty impressive — what, almost 500% annualized growth rate… Not too shabby, eh?”

Not too shabby at all.

Related links:
Google and Groupon – Lex
Google’s gambit for Groupon raises concerns
– DealBook
Why Groupon should take Google’s money and run – Mediaite