Why Groupon Said "No" to Google's $5 Billion Overture

[Brett_Tabke]

Confirming lots of speculation, a source close to Groupon board members tells us that anti-trust concerns ultimately forced Groupon to turn down Google's $6 billion offer. This source says the view on Groupon's board was that a Google-Groupon merger would draw more regulatory scrutiny than any other deal Google has ever done.

Because of this view – that Google-Groupon might not be allowed to go through and that it would take months and months to find out the bad news – board members decided they would need a significant break-up fee if they were to accept Google's offer.

We don't know the number, but our source says the board wanted a break-up fee akin to the one Google gave DoubleClick. A source close to DoubleClick's executive team at the time of that merger tells us the company "got significant protection." In agreeing to acquire AdMob for $750 million, Google also agreed to a $700 million kill fee.

[businessinsider.com...]

[walkman]

Yep, so it wasn't a $6 Billion check ready to be handed, it was a, 'maybe it will be approved and then we will give you a $6 Billion check.' That's a huge 'if' and the press might have killed Groupon over the many months and years.

[incrediBILL]

Considering Groupon could ultimately just be a flash in the pan currently thriving on viral word of mouth, a good break-up fee could've been an easy out for the investors.

Wait 6 months, if Groupon is worthless, Google breaks-up, cash out, move on!

Who cares, never found anything on Groupon worth using yet so it's a $0 deal for me.

[Brett_Tabke]

Wait 6 months and $6 billion will be cheap. Groupon is here to stay with an entirely new local based advertising model. The same model, that Google has not been able to master. Groupon has 3k employees working on 1 thing - deals deals deals. They are doing with phone calls, what Google AdWords has not been able to do with algos. Groupon has mastered local based advertising. Sky's the limit. How long before Google attempts to close Groupon?

[maximillianos]

Groupon has some very smart folks behind it. The amount of growth they have navigated over the past 2 years is astounding.

[walkman]

"Groupon is here to stay with an entirely new local based advertising model."
Ummmm....there's the "we will try it one time" but to stay at current rates is a no-no. A $100 service becomes $25 for the merchant as it needs to be at about 50% discount and Groupon gets a cut. That's not sustainable for obvious reasons.

And $6 Google Billion can buy a lot of office and advertising space for a Groupon copycat. Google will probably do that so all deals are offered and dealt online, similar to adwords.

[httpwebwitch]

Big G may have problems entering that space without acquisitions - since the success of Groupon, companies are coming out of the woodwork rattling their patents and throwing lawyers at each other.

[tangor]

It is the patent/copyright (method of business) that's the biggie for G. It will be interesting to see how this all plays out... G missed out on the "coupon" aspect YEARS ago and is playing catchup at the moment, and not liking it... and not offering real money for it, and has grown so large that antitrust now looms on many (most?) of their acquisitions.

[ispy]

Places like Groupon come and go. Give it 5 years and they will be a distant memory for one reason or another. Plus the coupons are not really that good a deal.

I wonder if the offer was really cash, or some weird stock deal/incumbent of future earnings.

[Demaestro]

A $100 service becomes $25 for the merchant as it needs to be at about 50% discount and Groupon gets a cut. That's not sustainable for obvious reasons.

Maybe not the narrow use-case that you outlined but in the real world this is a great service.

Think of businesses with fixed expenses. Like a Rock Climbing room.... it doesn't matter how many people come through the door the rent, the utils and the staff is the same price.

If you can get a bunch more people in the door even at 10% that is a good thing... This and many other scenarios are why it will be around for a long time to come.

[skibum]

It can be good IF the business plans for it and it doesn't take away from customers who actually pay and customers don't become trained to wait for the next Groupon to come out. With more competition, the Groupon profit margin may shrink substantially. They get a REALLY fat cut right now at 50% of the purchase price to the consumer. It is a simple model that scales well and could go global. It also takes some customer service which I'm not aware that Google is known for.

[kaz]

I don't believe you can offer something at 50% (or even 10% as mentioned here) of normal prices and it not cannibalize your sales.

[the_nerd]

If you can get a bunch more people in the door even at 10% that is a good thing... This and many other scenarios are why it will be around for a long time to come.

It is also a great way to ruin your prices. Nobody will want to pay the normal fee any longer.

[renoirm]

I think you guys are thinking the acquisition had anything to do with the deals or the technology. Both are worthless. The acquisition was purely a play for the sales team and the fact the company was cash positive. Groupons has 2000 sales people who work directly with small business. How long would it take Google to hire that? By the time they do they'll have lost a huge footing to both Groupons and Yelp (100 sales people estimated).

The math is this : Opportunity Cost for Building Sales Team + Yearly Revenue * Multiple(4 - 6 on Earnings) = $6 Bil

[scooterdude]

It will be an interesting one to observe, Groupon is kinda similar to google in a way

[Demaestro]

It is also a great way to ruin your prices. Nobody will want to pay the normal fee any longer.

Is this an assumption or do you have some data that would show this to be true?

I have seen many stores offer "sales" and yet people still shop in those same stores when there are no sales.

It is a simple model that scales well and could go global

It is already global.

[marketingmagic]

I looked into groupon, as well as a similar local based service and they both want 50% of the sale. Given the ridiculous commission they make, it's no wonder all you see in Groupon promotions are margin rich products or services. Certainly doesn't make sense in the consumer elecrtonics space where margins are extremely tight.

[onepointone]

Groupon takes 50% and is crazy profitable.
Maybe the next one only takes 35% and is nicely profitable. Takes away some business customers...
etc. down the line...

I don't know if they ever see 6B again.

[TinkyWinky]

it doesn't matter how many people come through the door the rent, the utils and the staff is the same price.

Apart from undermining your cost structure (ie more people will want a deal and not pay the full price) - more people means more wear and tear which ultimately means more costs

[IanKelley]

Maybe not the narrow use-case that you outlined but in the real world this is a great service.

From what I understand he was actually outlining the majority of cases. I've read from numerous sources that Groupon normally takes 50% of the businesses revenue on the offer (which is just insane to me) and requires a huge discount in addition to that. Doing a groupon offer with a small discount is not an option.

So unless you're selling something with a huge markup, or you can guarantee that X% of customers are going to spend money in addition to the coupon, you're going to lose money.

In some cases I can see the publicity being worth it (grand openings, innovations, etc...) but that's not the majority.

Groupon looks fantastic from a consumer perspective, and there's no question it's a cool idea, but as more and more businesses lose money running a groupon offer, it's going to get easier for a competitor who wants a smaller cut to take market share.

Google-Groupon merger would draw more regulatory scrutiny than any other deal Google has ever done.

Am I crazy or would a Google-Groupon buyout, in reality, draw zero scrutiny? This is just Groupon patting itself on the back :-)

[ByronM]

Wait 6 months and $6 billion will be cheap. Groupon is here to stay with an entirely new local based advertising model. The same model, that Google has not been able to master. Groupon has 3k employees working on 1 thing - deals deals deals. They are doing with phone calls, what Google AdWords has not been able to do with algos. Groupon has mastered local based advertising. Sky's the limit. How long before Google attempts to close Groupon?

I couldn't say it any better. Google couldn't replace groupon with an algo. Not for the sales experience nor for the customer experience. I think google just expects people to fold into their ideology Sometimes people need to be a part of the solution.. id don't think that is in googles mantra

[renoirm]

One of our sites in in the industry. They need a lot of hand holding. Think guide dog to the blind. But once they get it, they'll fire their PR agency ASAP.

[Strapworks]

I understand why they turned it down and its unfortunate because they will never get another chance at that much money.
Look at it this way - You really want to buy a new car but you know that you won't get accepted for financing so why even start the process.
Groupon knows that it would either not go through, or would cause a lot of trouble and time to make go through, so its just not worth the fuss.
I guess they are hoping someone else will step up that will make purchasing easier and/or they will just continue to make the money they make now.
Just my two cents

[Hugene]

I also don't believe this version of Groupon's board:

Google-Groupon merger would draw more regulatory scrutiny than any other deal Google has ever done

This is bogus, simply because Groupon is in a new market/niche that Google is not in at all. This is way less anti-competitive (like 100x) then the DoubleClick and AdMob deals. Google's business is (1) web advertising and (2) search engine. Groupon is in the email marketing / promotional marketing business, something G doesn't do at all.

The deal would have been okeyed, Groupon is just trying to build some hype.

But I don't think they ever see this kind of cash again, even compounding their profit for a few years. To get 6G of profit, if I assume their cut is 25% : sales would need to be over 24 G and assuming that their profit can not be more than 50% of sales, then that totals 48 G in sales.

No way they get this, so passing on this was a mistake.

[edited by: Hugene at 3:14 pm (utc) on Dec 17, 2010]

[Brett_Tabke]

>simply because Groupon is in a new market/niche that Google is not in at all.

No it isn't. It is in Local Advertising. This is totally Googles domain. It competes directly with Google's "places" advertising option. Groupon's biggest competitor is Google.

The only place future growth is going to come from, is directly out of AdWords pockets as local businesses stop advertising on Google and put more dollars into Groupon. There is strong evidence that this is happening already. The biggest evidence? Google offering $5 big ones for this competitor.

> I understand why they turned it down and its
> unfortunate because they will never get another chance at that much money.

I would invite you two to go take a long hard look at Groupon. Coupon marketing is here to stay. They have figured it out - Google hasn't.

$5 billion? Will turn out to be pennies on the dollar. Some have said the market cap for coupon and deal marketing is as high as $50billion a year currently.

[scooterdude]

if i may ask, does Groupon advertise off line in the USA ?

I've only seen their adverts online

[cien]

Cold calling, direct marketing to businesses.

[Brett_Tabke]

And now that everyone has heard of them and their incredible success rates, they are having stupidily high conversion rates on their cold calling. I've heard near 70-80%. This is something I don't think Google would be successful at doing on their own. The second an AdWords purchaser got a cold call saying they were from Google - peoples defenses would come right up. Where Groupon, people are willing to take on a new option.

[kaz]

Is this an assumption or do you have some data that would show this to be true?

Sure. Its just one example of many ....

[chicagobreakingbusiness.com...]

The pier sold 7,500 Groupons for the beginning days of its annual Winter WonderFest, an 283 percent increase from its first venture into discounted sales via Groupon last year.
This raised overall ticket sales by 12 percent. But use of the deal site, plus parking discounts at the pier, brought event revenue to date down 8 percent, to $420,000, pier officials reported Wednesday morning.

[Brett_Tabke]

The rest of the story there Kaz, would be to find out how much Navy Peir scored off the rest of the income they make during and after the fair. I believe NP runs like most malls, in that they take a percentage of sales from their independent stores. Clearly, sales as Navy Peir stores skyrocketed due to the 283% percent increase in attendance. Nor is there any mention if the attendance was up the rest of the fair - or what it is going to do to residual attendance to Navy Peir when the fair is over. I'd say, they hit a home run when it is all said an done. Everyone likes to complain about advertising fees.