Google Would Be Crazy To Spend $5B For Groupon

Google is sitting on more than $30 billion in cash so maybe $5 billion isn’t so much in that context. But it seems crazy (capital C) to me for Google to pay that kind of premium for the company — making it by far the largest acquisition in Google’s long history of acquisitions — despite Groupon’s global footprint and stellar growth.

Google could buy one or more of Groupon’s competitors (and a lot of other assets) and accomplish many of the same objectives at less cost. But what do I know?

I’m speculating that Groupon is in a position to make between $400 and $500 million in top-line revenue this year. Maybe more. But let’s assume it’s $500 million. That represents the total value of the deals that it sells. Its net is likely about half the top-line number. A $5 billion price (with or without an earnout) is about 10X revenues in my speculative scenario. That’s an ultra-super-premium.

What would Google be buying exactly if it were to acquire Groupon?

It would get the aforementioned revenue stream, which probably is internally projected to grow (see the hockey stick in your mind) to more than $1 billion in the next couple of years. It would get an emerging global brand and a channel to sell deals (and other stuff) to local businesses and national retailers and others. It would get a local “feet on the street” sales force, though I don’t know precisely how large. And it would get a massive consumer email list numbering in the many millions.

Yes Groupon is a spectacular success right now. But just as we now see “check-in fatigue” with Foursquare et al, there is what I will call “deal fatigue” emerging. In a year or two the “deals” market will undoubtedly look quite different than it does today.

Would a Google-owned Groupon still be at the center of that evolved marketplace? Probably. But would it still be raking it in and as popular as it is today? That’s less clear.

I’m not disputing Groupon’s model or value as a general matter. What I’m arguing is that the price is too high. However if Groupon were to go public it would generate much more than $5 billion at this moment.

The model that Groupon represents — “customers not clicks” — is, in the hands of Google, potentially disruptive in the local market. Research that I’ve participated in shows that businesses are very receptive to the idea of buying customers and minimizing the risks associated with advertising, where up-front spending generates an uncertain return (i.e., clicks and even calls). Many SMBs, as a crude generalization, are skeptical of PPC for example.

Google has long been trying to crack the local ad market. It recently started selling tags with a telephone sales force. This is a further step down that perhaps inevitable path for the company. And Groupon could become a highly effective local channel that could sell a number of products, including Boost, to the local market. Google-Groupon reps could also help encourage businesses to claim their Place Pages and collect better local data at the same time. Google has invested hundreds of  millions in building its own local maps data. This might be seen as part of that larger effort as well.

Yet consider that Google could buy a yellow pages publisher and its larger sales force for less than $300 million, a fraction of the cost of the rumored Groupon acquisition price. Google of course would never buy a YP publisher because of a number of issues: debt, culture clash, unwanted assets (print books). But you get the point about price.

Google could also buy one or more Groupon competitors (e.g., LivingSocial) and coupon assets (e.g., The Dealmap) for much less. But Groupon is the “brand” and the most visible and successful company in the segment. Groupon’s last funding round raised its valuation to the point where $5 billion is perhaps required to get the board to take an offer seriously. And there is a viable shot at an IPO, which would generate much more for founders and investors. So from those perspectives these numbers are not as crazy as they seem.

But were I David Lawee (VP of Corp Dev for Google) or Eric Schmidt or Patrick Pichette I would not do this deal — at this price.

Related Topics: Channel: Local | Features: Analysis | Google: Acquisitions | Google: Business Issues | Google: Maps & Local | Top News


About The Author: is a Contributing Editor at Search Engine Land. He writes a personal blog Screenwerk, about SoLoMo issues and connecting the dots between online and offline. He also posts at Internet2Go, which is focused on the mobile Internet. Follow him @gsterling.

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  • Tim Cohn

    While it does have revenue, Groupon hasn’t added any new value to the market other than through sleight of hand- Groupon removes it.

    The valuation reminds me of…

  • George Michie

    Great piece, Greg. If I had $5 Billion to throw around I’d not do this deal either…of course I’d also not be at work right now :-)

    Coupon searches have gone through the roof during this economic downturn as a handful of searches on Google Insight will show, but as you suggest, that phenomena may scale back as the recovery becomes more apparent to more people.

  • Josh Morgan

    Assuming that Groupon’s monthly revenue is $50MM as has been reported ($600MM annually) and a 30% pro forma ebitda (180MM) would mean Google is paying a hair over 29 times earnings. Google’s stock is trading today at 22 times earnings. One ought not forget the amount of cash on hand Groupon has at the moment as well (they’ve raised 170MM +any retained earnings). Plus the intangible assets with the brand value and market position. Guessing Groupon has a few good engineers as well, which Google could surely use these days.

    I am guessing Google can roll in Groupon into their Chicago offices, providing further efficiency and raising a normalized ebitda. It is not out of the question that Groupon will double in size once more in the next 365 days further enhancing their ebitda and dropping the earnings multiple to 14.7 (assuming 30% normalized pro forma ebitda, ceteris paribus) which means Google is buying at a solid discount or, dare I say, a Groupon. Sounds like a good deal to me!

  • Brian Hayashi

    $5B for Groupon? It doesn’t seem so crazy when you factor in Groupon’s brand equity w/SMBs.

    First, no Yellow Pages brand, Foursquare geomorph or coupon site comes even close to the fanboyish love small retailers feel for Groupon. If the valuation is solely based on the size of the sales force, perhaps buying a yellow pages company make sense. Me, I look at which one of dozens of sales pitches gets the best response from retailers. That’s where Groupon has an overwhelming advantage.

    Google is familiar with all of the arguments why Groupon is ephemeral — in fact, many are the same ones levelled against Google during its early days. I’ve been as big of a critic as anyone when it comes to Groupon’s notion of buying co-ops and calling factoring what it is. But it’s my sense that this $5 billion addresses a key GOOG initiative in a way no other investment could; i.e. how to monetize GOOG’s many and diverse local offerings at scale.

  • KJ

    At first glance this does seem like a huge amount of money. Google do get a working brand though that would integrate into their local strategy straight away. It will be interesting to see how badly Google want Groupon.

  • Tim Cohn

    Call me a skeptic but what if Google’s rumored “offer” to buy Groupon was instead a play ripped from the Microsoft Embrace, Extend, Exterminate playbook?

    Wouldn’t that be a deal?

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