Groupon (NASDAQ:GRPN) recently adopted a "poison pill" plan to fend off any hostile takeovers as its stock remains below $1. The plan -- which will last from April 10, 2020 to March 10, 2021 -- will kick in if a single person or group buys over 10% of Groupon's common shares, or if eligible passive investors accumulate over 20%.
If those conditions are met, Groupon's current shareholders will gain the right to buy additional shares at a steep discount to the market price, which would dilute a potential suitor's stake and make it more difficult to gain a majority stake. Groupon's decision was unusual, since companies usually adopt poison pill plans after hostile takeover bids have been initiated.
But it's also a logical defensive move, since Groupon's market cap has plunged nearly 90% to less than $500 million over the past five years. Its CEO and COO both recently resigned, it furloughed a large portion of its workforce amid the COVID-19 crisis, and many of its listed businesses are closed. All those weaknesses could leave Groupon vulnerable to a hostile bid.
Yet Groupon was already struggling before the COVID-19 pandemic started as it lost merchants and shoppers to other platforms like Amazon and Expedia, so some investors might actually welcome a takeover bid. But is anyone really interested in buying Groupon? Let's examine the three potential suitors that could force Groupon to swallow its poison pill.
First Trust Advisors
Groupon's statement regarding "passive investors" seems to target First Trust Advisors (NYSE:FFA), which offers mutual funds and ETFs. First Trust bought 41.7 million shares of Groupon at the end of March, boosting its position to 64 million shares and making it the company's top shareholder with an 11.3% stake.
First Trust's investment arm generally prefers taking minority stakes in companies in the tech, healthcare, financial, and business services sectors, so it's unlikely that the firm is trying to build a majority stake in Groupon. Instead, it likely thinks Groupon is undervalued at under a dollar per share, and took the opportunity to increase its stake. With the poison pill now in effect, it's unlikely that First Trust will increase its stake to over 20% and dilute its own holdings.
Groupon's statement regarding "a single person or group" seems to target Chinese tech giant Alibaba (NYSE:BABA). Alibaba bought what is now a 5.8% stake in Groupon to become its fourth-largest shareholder in late 2015.
Alibaba held roughly $50.5 billion in cash, cash equivalents, and short-term investments at the end of 2019. If it really wanted to take over Groupon, it could easily do so by buying up all the diluted shares. However, Alibaba hasn't increased its stake over the past four years, which suggests that its interest in the daily deals platform -- which could complement its overseas expansion and recent push into lower-income markets across China -- is waning.
Alibaba might still have faith in Groupon, but it seems like other marketplaces -- including Lazada in Southeast Asia and its new Kaola platform for cross-border commerce -- will take precedence over Groupon's struggling business.
Last September, several analysts suggested that Groupon was mulling a merger with reviews platform Yelp (NYSE:YELP), which is struggling to counter similar services from Facebook and Alphabet's Google.
Yelp held just $412 million in cash, cash equivalents, and short-term investments at the end of 2019, so it probably won't launch a hostile bid for Groupon. Instead, the two companies would likely need to pursue a messy merger of equals. Groupon's poison pill plan probably won't impact a potential merger with Yelp, but it could discourage other big investors from speculating on a deal or influencing the outcome.
Unfortunately, I don't think merging Groupon and Yelp would solve either company's problems. Groupon will still struggle to retain merchants, and Yelp's reviews will continue to lose relevance against reviews on Facebook, Facebook's Instagram, and Google Maps.
A bitter pill to swallow
Groupon's poison pill plan could buy it some time as it hires a permanent CEO and figures out how to win back merchants and shoppers. But it's tough to ignore how far the company, which was valued at over $13 billion during its IPO in 2011, has fallen. A fair takeover bid could be the best outcome for Groupon's investors, but I doubt First Trust, Alibaba, or Yelp will make any significant moves in the near future.