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Yahoo!'s Next Mistake

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Yahoo! (Nasdaq: YHOO  ) may be about to do something very silly with its money.

Silicon Alley Insider is reporting that Yahoo! has made it known to Groupon executives that it would be interested in buying the flash-deal giant for as much as $3 billion to $4 billion.

For Yahoo!'s sake, let's hope this isn't true.

Everyone knows that CEO Carol Bartz is under pressure to make exciting acquisitions to help offset its organic stagnancy, but overpaying for the flavor of the week is nuts.

Groupon rocks. I don't have a beef with the company. It's carving a cozy living with the simplest of models. It reaches out to local merchants -- primarily restaurants, spas, hotels, and leisure providers with flexible pricing -- and offers to make them the deal of the day to its growing list of city-specific email blast recipients.

The deals can be substantial for the consumer. An upstart restaurant may offer a $50 voucher for $25 through Groupon. Since Groupon's cut is typically half of the voucher's price, we would be talking about a restaurateur with enough empty tables to be willing to sell $50 worth of future purchases for $12.50.

Merchants flock to Groupon, just as eateries flock to and Rewards Network (Nasdaq: DINE  ) to drum up new business. It remains to be seen if the model is viable in the long run, especially if Groupon only attracts penny-pinching opportunists who don't follow through with repeat visits to participating merchants at non-discounted prices.

However, the real threat to Groupon is that you have to squint to see its moat. It's an easy model to get off the ground, especially for established sites that already reach millions of users in niche-specific areas.

The Knot (Nasdaq: KNOT  ) , OpenTable (Nasdaq: OPEN  ) , Yelp, and Travelzoo (Nasdaq: TZOO  ) have all announced Groupon-esque initiatives in recent months.

AOL (NYSE: AOL  ) is so high on the model that it's turning its domain -- formerly an unofficial hub for players of Activision Blizzard's (Nasdaq: ATVI  ) World of Warcraft -- into yet another Groupon clone.

There's nothing wrong with aiming for the top dog in this quickly crowding niche. It made sense when the rumor first surfaced earlier this year, seemingly at a more realistic price. Yahoo! would be wrong to overpay. Heck, it can buy The Knot, OpenTable, and Travelzoo -- all three, at hefty premiums -- for less than what it's rumored to be shelling out for Groupon.

Oh, and it could also just buy AOL.

Yahoo! failed to offer just enough to buy Facebook a couple of years ago, and it's kicking itself now. Unfortunately, Groupon is no Facebook.

You're smarter than that, Yahoo!.

Should Yahoo! buy Groupon? Share your thoughts in the comment box below.

The Knot and OpenTable are Motley Fool Rule Breakers picks. Activision Blizzard is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz wonders if it's time for Yahoo! to shed the exclamation point. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 10, 2010, at 1:42 PM, BioBat wrote:

    I'm not going to comment on the financial part of the deal but I think you're underestimating Groupon's brand recognition. Others are offering similar services but to say the deals offered are any way similar is misleading. I use both Groupon and Travelzoo. With Groupon I get daily deals targeted to my city and surrounding area - sometimes I use the coupon once and never go back, other times I end up as a return customer - Groupon just gives me the opportunity to try new things in my area that I might like without breaking the bank. With Travelzoo, unless I'm from one of 15 cities they're currently offering deals in, I just get 'local' deals on Las Vegas hotels (Las Vegas is 2000 miles away). In other words, it's pretty much useless at this point.

  • Report this Comment On November 10, 2010, at 10:22 PM, dollarpuppy wrote:

    The value of Groupon isn't so much in its subscriber list, it's in the sales force. Groupon's massively effective team allows them to get quality deals in a huge number of metropolitan areas both within and outside the US.

    Their position is valuable for its brand and their customer relationships, but their true value is in their vendor relationships. And now, they've launched a self-service platform for their affiliates: Remember when well established brands like eBay and Amazon added storefronts?

  • Report this Comment On November 11, 2010, at 10:57 AM, TigerPack1 wrote:

    Yahoo! should be a seller of some or all of its large Asian Yahoo! Japan and stakes at rich prices presently. Combined they are worth in the $20+ billion range today.

    Then when double-dip recession is ravaging the markets and economy in 3-6 months, and the above transactions have cleared money to the bank, Yahoo! should buy each stock listed above and many more. Groupon, AOL, OpenTable, Travelzoo, the Knot and others could easily be purcahsed for the $20+ BILLION Yahoo! could have in the bank.

    You are correct in your analysis that smart takeovers and purchases are made at low prices not high ones. I will give you that. It doesn't much matter at this stage. When private equity makes their bid for breaking up Yahoo!, MSFT will swoop in and eat the company whole soon.


  • Report this Comment On November 11, 2010, at 1:08 PM, Brent2223 wrote:

    I agree that the lack of a moat is a huge risk for any of these companies. Starting to sound like the dot com boom again, start a company that doesn't do anything other than bringing vendors and customers together and it’s the best thing since sliced bread. The internet already does that, these companies thinking that they’re going to revolutionize everything have a tiny nugget of truth but a mountain of PR spin. If you're looking for interesting emerging IT companies I think the money is with companies that accumulate content rather than just being a communication tunnel. For instance, ACOM - it's a cool tech company that's quietly accumulating alot of interesting data, I'm sure it's only a matter of time before Google or another big player buys them out, not for their technology or infrastructure, just for the data.

  • Report this Comment On November 11, 2010, at 3:00 PM, langco1 wrote:

    hiring carol bartz as ceo was yahoo's last mistake this company will go bankrupt in under a year....

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