The Sanity Behind Google's Insanely Expensive Groupon Bid

Would you pay $6 billion for a digital coupon company?

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Today Google is holding a conference call with executives of the daily coupon service, Groupon, to secure a reported $6 billion acquisition of the company. If the deal goes down, it will be the search giant's largest acquisition ever. But to many, the aggressive bid is fraught with risks. Groupon, after all, relies on selling digital coupons, a business that, because of its low barriers to entry, is flooded with competitors. It's also just a baby, a mere two years old. Sucharita Mulpuru, a retail analyst at Forrester Research, summed up her skepticism quite pointedly. "A multibillion-dollar valuation for a company that is in a business with virtually no barriers to entry and is younger than my toddler is absurd."

So why is Google aggressively pursuing this acquisition? Business and Silicon Valley watchers explain the search giant's enthusiasm:

  • Investors Are Anxious for Google to Spend Its Cash Hoard, Reuters reports:

The Internet search leader's $33 billion in cash and short-term investments, one of the largest war chests in the technology industry, is getting on Wall Street's radar. Some analysts warn that shareholders could become disenchanted if Google does not find good uses for that swelling purse, amid some grumbling about its investments in self-driven cars and wind energy, among other non-Web businesses.

"Investors really want to know what Google's strategy is for its huge cash position," said Cowen and Co analyst Jim Friedland. "At some point, they're going to have to return cash to shareholders or their stock is going to get penalized for it," he said.
  • Groupon's Business Model Is Genius, writes Edward Lee at The Huffington Post:
Groupon is already profitable and makes money from selling stuff--albeit, coupons. Businesses can offer customers in their cities massive discounts, usually 50% or more from retail prices through group coupons, or "groupons," sold on Groupon's site. For example, Nordstrom recently offered a groupon worth $50 of merchandise for only $25. Quite a bargain. Nearly 50,000 consumers purchased the groupon, generating over $1.2 million from that one sale. Half of the cut, or over half million dollars, is expected to go straight to Groupon. By now, the genius of Groupon's business model should be apparent. It requires very little overhead or physical infrastructure because all it sells is a digital coupon over the Internet.
Microsoft could just as easily swoop in and use Groupon to bolster Bing's targeted ads. Facebook could use Groupon's vast merchant directory to expand its own local offerings. But in buying Groupon, Google will gain a powerful weapon in the battle for web supremacy against Facebook, which is clearly making "local" a priority with the introduction of the Facebook Places check-in feature last August and  Facebook Deals, which lets businesses offer deals when customers check-in via Facebook Places. The fit might be even better than it was for Google's aborted acquisition of Yelp, in that Groupon hasn't worked very hard to develop its own exhaustive local database the way Yelp has -- rather it simply caters to companies and customers that use it. But -- if Google can take Groupon's engaged user and local business data and combine it with their exhaustive local information, they might finally be able to unlock the value of their local efforts.
  • It's All About Local Advertising, writes Ben Parr at Mashable:
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. Few other companies have the attention of local businesses that Groupon commands. And few have the expertise to turn that attention into a steady and consistent firehose of cash.

This article is from the archive of our partner The Wire.