Tuesday, January 11, 2011

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Groupon Says No to Google

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Groupon denies Google’s $5.3 billion bid for the company.

Prior to December 4, 2010, speculation was rampant and opinions were strong regarding Google’s (GOOG) controversial bid for Groupon, one of the fastest growing companies in the technology space.  It was reported that Google had made an offer of $5.3 billion for the booming online coupon shopping portal, with a further $700 million to be based on Groupon’s ability to achieve certain performance targets.  The deal itself had investors and analysts abuzz, questioning whether the acquisition was the right move for either company.  Some with a stake in Google feared that the valuation on Groupon was unjustified and that the online search powerhouse could internally replicate the web-based marketing services provided by the company it was attempting to acquire, without the $6 billion price tag. Conversely, there were supporters of Groupon who felt that the website’s extraordinary growth potential meant that Google was an unnecessary addition to an already promising future.  However, as stakeholders in both companies waited to hear the outcome of what was believed to be a likely acquisition, the unexpected news broke out that the deal had officially been turned down.  Suddenly, all of the preceding qualms and concerns had become irrelevant, and the end was marked of what would have been the most expensive acquisition in Google’s history. 

In the last few years, Google has made successful bids for many notable online businesses including dMarc Broadcasting, YouTube, DoubleClick, Postini, AdMob, ITA Software, and Slide.com.  Even the most costly of those, however, (DoubleClick – $3.1 billion) represents less than half of what Google was willing to spend to acquire a business hardly two years old.  So what makes Groupon so special?  First, the company is a strange creature in platform-obsessed Silicon Valley, as it was not founded by a Stanford computer scientist, but a Northwestern music major, Andrew Mason.  The company’s business model is built on linking merchants wanting to offer substantial deals to their consumers to the critical masses. The deals are featured on Groupon’s website and customers pay Groupon directly.  Subsequently, the company pays the merchant its share for advertising with them, while retaining 50% of the revenue generated from sales.  It is this simple model that has transformed the firm into a runaway success a mere two years after its inception.  Groupon is currently on track to book $500 million in revenue this year, is backed by a 3,000-person sales force, and has the reputed title of the fastest growing company in U.S. history. 

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With its rejection of Google’s bid, Groupon has effectively indicated that it believes it has the resources to continue its domination of the market alone.  Many have rightfully pointed out, however, that without any intellectual property of its own, Groupon’s system is being replicated everywhere.  Without a technological barrier to entry, hundreds of clones have emerged around the world, providing virtually identical services.  What most fail to realize, however, is that the value in Groupon lies not in its technological framework, but rather, in its people and vast customer base.  While it would be relatively simple for a company like Google to duplicate or even improve upon the Groupon website, the company’s mature and profitable consumer base would not transfer quite so easily.  Similarly, much of Groupon’s success can be attributed to its sales force of 3,000 people.  Not even a company as established as Google could easily or quickly mobilize such a team of people, because, at its core, Google is a technology company not designed to be capable of emulating the people-intensive nature of social buying websites.  In other words, while there may be no intellectual property-related barrier to entry, other barriers do exist.  It is for this reason that, despite its hundreds of competitors, Groupon commands 79% of the market share , while its top competitor, LivingSocial, only has an 8% share. 

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With this knowledge, Google’s willingness to fork out billions for the company becomes easier to understand.  On the same note, it becomes even clearer why Groupon felt it was in a position to turn down such an offer.  But this was not the first time that a promising online start-up rejected a bid from far more established industry players.  In 2006, Facebook turned down bids from both Viacom and Yahoo, and has since grown to boast a valuation figure in the tens of billions.  Given its incredible history of growth and future potential, Groupon is also almost certainly better off without Google.  And as talks begin to shift to the possibility of a Groupon IPO that may come as soon as early next year, the realization sets in that Groupon may not have been the only winner in this outcome.  Google has long been criticized for using its enormous cash piles for the pursuit of acquisitions like this one, as opposed to returning that cash to shareholders via dividend payments.  This rejection may serve as an opportunity for the company to re-evaluate its decisions and perhaps learn that superior resources do not guarantee success in every arena.  Regardless of what either firm takes away from the end result, however, and setting business aside for just a moment, it is, admittedly, refreshing to witness a company confident enough in its future to deny the requests of the internet Goliath, and walk away unscathed. 

 

Further Reading:

Groupon Company Background

Wall Street Journal Article

Forbes Article

Weekly Newsletter

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