Great Speculations: A Google and Groupon Marriage
Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are a number of speculations in the market that Internet behemoth, Google (NASDAQ: GOOG) wants a piece of Groupon (NASDAQ: GRPN) again. As a result, shares of Groupon shot up more than 20% on Friday afternoon, after reports from Bloomberg. In a recent conference, Groupon CEO didn't comment on takeover rumors from Google. While rumors are mere rumors, Google's interest towards Groupon is nothing new, it tried to acquire Groupon for $6 billion dollars in 2010. It might make strategic sense for both parties to reconsider a financial marriage.
Google's Thirst for All Things Local
Google has it eyes firmly set on local. It courted online consumer reviews site, Yelp (NYSE: YELP) for a reported $500 million and also Groupon for a buyout. However, in both instances it got shut down. After its failed conquest of Yelp and Groupon. Google set out to build its Google+ Local platform which is an integration of Google+, Zagat Survey, Frommer's and Google Maps. In addition, Google also has Google Offers which bought Germany-based, DailyDeals. Google's Management has said in the Q3 earnings call, that they want to gain a bigger piece of the Commerce and Local Business. Buying out Groupon will give a strong foothold on the Local Ads, Deals, as well as a large number of Merchant Relationships with small businesses which are extremely hard to build.
What's in It for Them?
Google's cash position is a strategic asset that Google uses to pounce and Google will likely be interested in a deal that is priced much lower than the previously offered $6 billion. Why? Because Groupon comes with substantially more signed up users, more deals, more merchants and an exciting new business line, i.e. Groupon Goods and it is in the process of building a robust Local eCommerce Marketplace.
Groupon Management team has been humbled after entering the public markets, they will get to save face and create some shareholder value which has taken a huge hit after the IPO. It has managed to grow its top line in a remarkable manner, grow active customer accounts to 39.5 million, generate free cash flow of roughly $145 million in the first nine months of 2012, but it has failed to grow its bottom line profitability.
Groupon’s expertise of local markets and relationships with local merchants can be further leveraged with Google’s technological know-how and other resources to take it to the next level. Groupon's presence in 48 countries will immediately give Google access to a number of untapped markets for cross-selling a number of Google products and services.
Integration with Google Shopping, Local+ and Offers
Google Shopping has transitioned to a paid model and is now providing product information with pictures, pricing and even local inventory information for more than 1 billion products from thousands of merchants. The model generates revenue based on product listing ads.
A Google and Groupon combo would be able to build out Google+ Local, Google Shopping and Google Offers with Groupon's sites in Google Search. It would generate substantial amounts of incremental revenue in the form of more Product Listing Ads as well as portraying more Groupon Deals, while building out Groupon's Local eCommerce Marketplace.
Google's Acquisition Prowess
Google has a phenomenal track record of buying up high potential companies with disruptive technologies and masterfully integrating those businesses with its gigantic operations. Google's inorganic growth strategy has had a number of home runs in the form of AdMob, YouTube, DoubleClick to name a few.
However, possible road blocks for a deal of this size to come to fruition are the FTC's ongoing investigations of Google's practices in its search results and also Google's gigantic size and scale. If such a deal was to be considered by Groupon management, who already turned down a deal from Google, it is very likely Groupon would ask for a sizable break-up fee, which might cause negotiations to fall out.
Making Sense of It All
Other players in the local space, such as Yelp and Amazon (NASDAQ: AMZN) backed, Living Social all losing money, Groupon might be tempted to use Google's giant scale of operations and rejuvenate its operations and enhance monetization. In fact, Amazon took a big write down of $169 million on its equity method investment in Living Social which pretty much shows the state of that business.
Google will get its Local ambitions fast forwarded substantially by getting its hands on Groupon. It would be able to build out Google+ Local, Google Shopping and Google Offers with Groupon's sites in Google Search. Also, integrating Groupon's Goods business which has a gross billings run rate of ~$1.5 billion, with Google Shopping allowing Google to lock horns with eCommerce Giant, Amazon. Amazon has been sending traditional brick and mortar retail operators one after another to the death row. The benefits accrued to both Groupon and Google from a deal are pretty evident.
ishfaque has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Google. Motley Fool newsletter services recommend Amazon.com and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!