Please ensure Javascript is enabled for purposes of website accessibility

Could These 3 Companies Force Groupon to Swallow Its Poison Pill?

By Leo Sun - Apr 15, 2020 at 10:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Groupon shores up its defenses against a hostile takeover -- but is anyone even interested in the struggling company?

Groupon (GRPN 1.03%) 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.

Two pills bearing the skull-and-crossbones poison symbol.

Image source: Getty Images.

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 (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.

Alibaba

Groupon's statement regarding "a single person or group" seems to target Chinese tech giant Alibaba (BABA 1.36%). Alibaba bought what is now a 5.8% stake in Groupon to become its fourth-largest shareholder in late 2015.

Boxes in a warehouse.

Image source: Getty Images.

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.

Yelp

Last September, several analysts suggested that Groupon was mulling a merger with reviews platform Yelp (YELP 1.72%), 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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Facebook. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook. The Motley Fool recommends Yelp and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Groupon, Inc. Stock Quote
Groupon, Inc.
GRPN
$12.69 (1.03%) $0.13
Yelp Inc. Stock Quote
Yelp Inc.
YELP
$38.54 (1.72%) $0.65
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$92.43 (1.36%) $1.24
First Trust Enhanced Equity Income Fund Stock Quote
First Trust Enhanced Equity Income Fund
FFA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
373%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/10/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.