Tuesday, November 30, 2010

Google May Acquire Groupon for $6 Billion, and It Would Be Worth Every Penny

Forget the rumor that Google acquired Groupon for $2.5 billion; the search giant is about to close a deal for the group-buying service for a whopping $5.3 to $6 billion, according to multiple reports.

It would be worth every overpriced penny.

The deal is worth $5.3 billion with an additional $700 million earnout based on performance, according to All Things D. The New York Times reports that a deal could be completed as soon as this week. With a price tag almost double that of DoubleClick, Google’sbiggest acquisition to date, there are still plenty of ways for this deal to fall apart.

Earlier this year, Yahoo tried to snag the group-buying company, but failed. Google, with its $30+ billion cash reserve, reportedly then offered Groupon $3 billion to $4 billion. However, it was rebuffed, so the tech giant upped its offer.

Groupon pioneered the group-buying model through its deal-of-the-day business model. Launched in November 2008, the company has grown from an offshoot of ThePoint to a multi-billion dollar empire with thousands of employees worldwide. In April 2010, Groupon raised $135 million from Digital Sky Technologies, setting its value at over $1 billion.

If the Google deal does go through at a $6 billion valuation, that would mean that Groupon’s value has grown by more than $625 million per month or over $20.8 million per day. That skyrocketing value is simply mindboggling.

Acquiring Groupon: Overpriced or a Genius Move?

There are many reasons to think that Google would be overpaying to get its hands on Groupon. Any company whose value rises by $20 million per day risks a flameout at the level of Pets.com. $6 billion is a stretch almost any way you slice it.

Still, Groupon has an asset that Google covets so highly that it’s willing to pay billions: local advertisers. Through its massive sales team, Groupon has built an impressive array of relationships with thousands of restaurants, spas and local businesses in hundreds of metropolitan areas. It’s a market that Foursquare, Facebook and Yelp all target, but none of them has figured out the formula like Groupon.

The group-buying website’s value isn’t in its technology — the flood of Groupon clones proves that — but in its unparalleled distribution. No other company in the world has the attention of local businesses that Groupon commands. And no other company has the expertise to turn that attention into a steady and consistent firehose of cash.

It’s that attention and expertise Google wants. This is about taking Google’s ad platform to the next level. It also doesn’t hurt that Groupon is set to exceed $500 million in revenue this year. It’s a multi-billion dollar business in the making.

If Google goes through with the biggest purchase in the company’s history, it will have the upper hand in local business advertising. That advantage could be so great that the courts stop this acquisition from ever happening. That’s why Google wants Groupon so badly that it’s willing to overpay by billions; if all goes according to plan, the search giant will be flooded with so much local advertising revenue that it will be able to buy a dozen Groupons
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