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Google's (Nasdaq: GOOG ) recently reported, and ultimately unsuccessful, $6 billion bid for crowd-sourcing coupon leader Groupon certainly stoked the fire of many equity bulls looking for the next Groupon-like company that would be gobbled up. But what investors caught up in such excitement sometimes forget to do is try to figure out why an acquisition makes sense; or, in this case, why Google was willing to pay such a premium for this easily replicable business.
The business idea is being copied and applied by many already strong companies; OpenTable (Nasdaq: OPEN ) , Travelzoo, and AOL have all entered the fray. Amazon (Nasdaq: AMZN ) just invested $175 million in Groupon's biggest rival, LivingSocial, and eBay bought local retail deal finder Milo.com.
Still, Groupon is the Kleenex or Xerox of this industry. Vendors want their business on Groupon's site and this has created a competitive advantage through bargaining power that its competitors don't have. In addition, CEO Andrew Mason has built a local sales force with a strong culture that Google has attempted -- but failed -- to create organically and through attempted acquisitions (Yelp).
I bring this up because shares of Local.com (Nasdaq: LOCM ) got smashed Friday to the tune of about 25%. Local.com provides consumers with a search engine for local deals or coupons, and has been one of many companies that have seen increased interest from investors since news of a possible Google deal for Groupon became public. Friday's stock decline was due to the company lowering its projected revenue and earnings for the coming year. Local.com also announced that it bought its own Groupon platform called iTwango. The pickings certainly were not slim, as there are now more than 200 similar sites in the U.S., and more than 500 abroad.
The point is that making investments on companies with shaky fundamentals based on potential acquisition is a risky proposition. However, while you may not be able to invest in hot dot-com companies of today like Groupon, Twitter, and Facebook there are still best-in-breed ways to play this online social trend. You just need to look overseas to China.
Internet leaders in China
China now has more Internet users than any country in the world, taking the lead from the United States in 2008, and it is still growing rapidly. In fact, China has added about 36 million new users since 2009, which equals the entire population of California.
Baidu (Nasdaq: BIDU ) , the Google of China, has taken the opposite approach to Google in its attempt to get in on the group-buying craze. Baidu recently introduced its Shenbian hub where users can post reviews of all types of merchants, and it is combining the site with its group-buying platform. Baidu already has a built-in audience, as more than two-thirds of all Internet search queries in China are done on its site. According to Alexa.com, Baidu is the most popular site in China and the sixth-most popular in the world.
SINA (Nasdaq: SINA ) , a less-known Chinese Internet company that is the fourth-most popular site in China, is another great way to play these emerging trends in China. It is China's largest online news portal, but is now focusing much of its growth on its social media initiatives. SINA operates Weibo, which is China's equivalent of Twitter. The site has more than 80 million users, a number that is expected to double by the end of the year.
SINA is also working with other companies and services to make its microblogging site a more integrated social and networking experience. For example, it is partnering with Microsoft (Nasdaq: MSFT ) China's widely used instant messaging service so users can link it with their Weibo accounts. SINA has also created a fund for third-party application providers.
Even Facebook founder Mark Zuckerberg is excited by the prospects for SINA and Baidu, as he visited with both companies on his recent "vacation" to a country where his own website is banned. No one is quite sure exactly what was discussed or if any partnerships were formed during his visit. However, Zuckerberg has mentioned on many occasions that China is a key area of growth, and a market he badly wants to be in. For now, it seems that alliances with these social media leaders may be his best bet.
These Chinese leaders offer best-in-breed online businesses in the fastest growing Internet market in the world, which sounds pretty good to me.