Google Just Dodged a Bullet

Google (Nasdaq: GOOG  ) won't be getting its Groupon after all.

The Chicago Tribune is reporting over the weekend that the market leader in social couponing is rebuffing Google's offer, reportedly in the $5 billion to $6 billion range.

It may go public on its own next year. It may not. Either way, two unnamed sources with "direct knowledge of the situation" are telling the Trib's Melissa Harris that Groupon won't be selling out to the world's largest online company.

It's just as well.

Groupon is the Web 2.0 flavor of the month. Just as it was launched only two years ago and rose to the point of turning down a multibillion-dollar acquisition offer, fortunes can turn quickly.

Only a few make it out alive
One of the few exceptions to the rule was Facebook's decision to walk away from Yahoo!'s (Nasdaq: YHOO  ) offer three years ago, reportedly for roughly $1.2 billion. The social network has grown to more than 500 million registered users worldwide, and its value now is estimated to be in the tens of billions of dollars.

One can only imagine how hot Yahoo! shares would be right now if it had managed to snag Facebook at the time. It would be the one gaining key executives, instead of losing them.

Secondhand trades of Facebook shares hint at a market cap approaching $40 billion -- or more than double Yahoo!'s enterprise value.

There are also a handful of companies that cashed out too soon. YouTube should be worth more today than the $1.65 billion shelled out by Google. PayPal has become the real driver for growth at eBay (Nasdaq: EBAY  ) these days, clearly worth more than the $1.5 billion in stock that eBay paid for it in 2002.

Unfortunately, I don't think Groupon will be the "I told you so" type. History will lump it with Digg, Yelp, and Foursquare as Web 2.0 darlings that let pride get in the way of settling for a generous exit strategy.

You're gonna need a bigger moat
What makes Groupon so special?

  • Unlike distant rivals LivingSocial and BuyWithMe, Groupon has a marketable name.
  • The ability to get a free deal voucher by simply recommending the daily flash sale to three friends is a viral gimmick that's brilliant, but easy to replicate.
  • It's been a speedster, ramping up an army of local merchants and hip writers to establish a presence in most relevant cities.

How hard would it be for Google, Yahoo!, Microsoft, and AOL to hop on board? They already have the relationships with local merchants in place. They all receive gobs of traffic. They have constant contact with local consumers through their free email platforms.

The light bulb has already been going off at AOL, where it nixed the World of Warcraft community site it ran at WOW.com to turn the simple domain into a flash sale site. It's already serving up deals for three cities -- Boston, Philadelphia, and Washington, D.C. -- as well as a national offer.

Ever since its surprising launch last year, Microsoft's Bing has emphasized its comparison shopping and travel tabs. It wouldn't be that hard to turn on the spigot of Groupon-esque deals.

Just last week, Chinese leader Baidu (Nasdaq: BIDU  ) rolled out its own deal platform. China didn't even have a Groupon-esque site a year ago, and now there are hundreds in the world's most populous nation.

Groupoff, for now
Groupon may have the first-mover advantage. It is the undisputed champ in this niche. However, what good would it have done Google to spend as much as $6 billion on a lucrative model that's about to be crashed like a high school kegger?

Folks will continue to flock to Groupon, but it won't be long before they're swayed by similar deals being marketed by AOL and the other dot-com heavies. Ask.com parent IAC (Nasdaq: IACI  ) may have issued editorial layoffs at Citysearch last month, but it won't be long before those light bulbs begin going off to create a more content-centric local deals website.

This seems like a great niche right now, but will it feel that way when claustrophobia sets in? Then we'll see one cutthroat gunslinger, willing to take far less than a 50% piece of the action and passing on even bigger savings to the end user. That's when the margins will begin to fall. You didn't think that Groupon could keep these 100% markups forever on these vouchers, did you?

Groupon will regret passing on Google's billions then -- if it isn't doing so already.

How do you see this realm playing itself out in a year or two? Share your thoughts in the comment box below.

Google and Microsoft are Motley Fool Inside Value choices. Baidu and Google are Motley Fool Rule Breakers recommendations. eBay is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google, and Microsoft. 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 is a fan of discount sites, and he's already tracking local deals through Groupon and LivingSocial. He does not own shares in any of the companies mentioned in this story. He 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.


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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 December 06, 2010, at 10:27 AM, TMFKris wrote:

    Are restaurants and other businesses going to be so willing to participate in offering such great (for customers) deal when the economy picks up and customers aren't so hard to come by?

    Kris -- TMF copyeditor

  • Report this Comment On December 06, 2010, at 5:21 PM, Sparkynet wrote:

    Thanks Groupon,

    signed,

    Google shareholders

  • Report this Comment On December 07, 2010, at 12:03 PM, lctycoon wrote:

    $40 billion for Facebook? I really did miss the year 1999...

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