Google is working on a high-profile takeover. Various sources are talking about a USD 6 billion bid for Groupon, including an ‘earn-out' of USD 700 million for achieving certain targets. In the history of Google, this is a big takeover, nearly double in value of its largest acquisition to date (DoubleClick: USD 3.1 billion) and more than half of the total of what Google has ever spent on acquisitions (about USD 8 billion). Looking at Google’s cash reseves of USD 33.4 billion however, shows that the price is not too high.
Groupon (a contraction of group and coupon) was formed in response to the US coupon phenomenon, which are printed in many daily newspapers to be redeemed for a discount at various shops. But Groupon has pushed the coupon system even further, into the ‘daily deal’. One of the pioneers of this phenomenon is US company Woot.com, which was bought by Amazon in June for USD 110 million. A similar service, Daily Candy, was purchased by Comcast in 2008 for USD 125 million. These companies send a daily email to members –Groupon counts 35 million- informing them over an item available at a discount. This could be anything, from entrance tickets to sunglasses. Sources say Groupon has a 50:50 revenue sharing agreement with retailers and sometimes earns more than USD 10 million in one day. Currently, the annual sales run rate is at USD 500 million. Groupon can therefore, despite its young age (two years), hardly qualify as a start-up, with 3,100 employees worldwide and operations in 300 ‘markets’ (cities).
We now come to the reasons for Google to acquire Groupon. And there are many:
• Google buying Groupon would prevent Yahoo, Facebook, Amazon, eBay or Apple from doing so.
• Groupon could become a new 'standard', as did Facebook for social networking and Twitter for microblogging.
• Groupon is growing rapidly and expanding to a number of countries via acquisitions. In this way, it takes out competitors.
• Judging from the rumour mill (50:50 revenue sharing), Groupon must be a very profitable money machine.
• Google has taken some steps into e-commerce with Google Checkout (payment system), Google Product Search (formerly Froogle, comparison shopping) and most recently Boutiques.com (fashion discovery).
• With Groupon’s 3,100 employees, Google, with its own more 23,000 workers, gets a large international sales force very familiar with local retail markets.
• Groupon’s 35 million members can, in a sense, be described as a social network.
• And last but not least, Google’s cash reserves of USD 33.4 billion give only low returns.
Still, USD 6 billion is a hefty price tag for the two year old Groupon. One must ask whether the system could not easily be replicated. The entry barrier seems to be low. But that was also true for YouTube, which has nevertheless developed into a standard. Another objection is that the 35 million members have a limited relationship with each other (friends are also invited to participate), so it is not a true social network. It would then be a bit far fetched to call Groupon a 'social network' takeover.
In previous acquisitions, and especially for YouTube, the question was how Google could earn its money. That does not seem to be a problem with Groupon, but integrating the company with Google’s other activities is not so obvious - although of course adverts can be placed everywhere. Still, Google might just manage to use Groupon as a foundation for everything it has developed in the last few years around the 'social web'.
If the deal goes through, one thing is certain: the current shareholders, including Battery Ventures and Accel Partners, will make a huge profit. In April 2010, when the company drummed up USD 135 million from venture groups, Groupon was still valued at USD 1 billion. Together, different market parties have put only USD 171 million into the company.
