When a search giant that makes $23 billion a year goes after a group discounting website that makes $500 million a year it raises many questions. But the most important question is how much is it willing to pay? Google, which is reportedly scouting for Groupon, is heard to have put a price tag of about $6 billion for a discounting website, that has absolutely no barriers to entry. But that issue can be discounted by the fact that Groupon has already built terrific traction in its business. Based out of Chicago, the company basically provides bargaining power to its users, and then using that power negotiates and gets discounts from retailers to these users. In the process, its takes a cut. Its a localized business that scales to national or even international level. With around 17 million users in North America alone, Groupon is an undisputed leader in its field although many others such as LivingSocial are catching up. Its easy to see how Groupon fits into Google's ambitions.
A) One of the hottest areas on the Net is location-based social networking done thru mobile devices. FaceBook (500 million users) has this feature, FourSquare (4 million users) is a pioneer and there are many others working in this space. Google has Latitude, which allows users to allow friends to view their location. So location meets retail deals, a white hot deal for mobile users. Google, starved for attention in the social media networking space, will gain immediate access to the installed users of Groupon and then combine them with Latitude to come up with synergies in this space. It will also be a check on FaceBook's check-in and FourSquare's growth.
B) Google gets about 99% of its revenue from ads. Groupon makes money by getting a cut from the retailers to whom it drives customers. Groupon has a large salesforce that constantly negotiates with local businesses for deals. Groupon will give Google leads into local advertising and insights into local spending habits. This ties in well with Google's prime revenue stream, AdWords and AdSense. Targeted search is always good to improve ads in Google. Already small businesses in Europe are complaining that Google is undercutting them by not properly displaying them in search results, so such local learning will help Google better serve its ads.
C) Google Maps, is another product that ties well with Groupon's efforts. Google Latitude is actually based on Maps and this goes back to point A above. You see the synergies?
All this goes back to the main question. How badly does Google want Groupon? As badly as spending the reported $6 billion? This would make it the most expensive acquisition ever for Google, more than the combined price it paid for YouTube and DoubleClick.
Let's see how traditional valuations are done.
1. Discounted Cash Flow: Expected future earnings discounted to present value.
2. Relative value: Finding the market price of similar assets/goods/companies.
3. Option price: Black/Scholes/Merton, lets not even go there.
4. TTM: A multiple of Trailing Twelve Month (TTM) revenues is used for Internet companies (e-commerce 3XTTM and other Internet companies could be more than 3X).
Groupon reportedly makes about $500 million. Maybe $6 billion comes across as a desperation price when trying to use DCF. Using TTM, Groupon could be valued at $1.5 billion (500 * 3). I dont know how you can use 2 and 3 from above to value it. Maybe there is some other style of valuation used by the brainiacs at Google. Groupon has countless imitators, and apparently its repeat use is less meaning low customer loyalty. Although it can boost Google' social media ambitions to some extent, whose to say that someone else like LivingSocial cant scale to current Groupon's size? When it comes to deals, customers usually lose their loyalties. Besides, how does a strong salesforce oriented company integrate with a strong engineering company? I guess, in the end, if A,B,C > 1, then surely $6 or so billions seems ok, considering Groupon's traction and Google's localization ambitions. With Marissa Mayer overseeing the local business now, Google seems pretty darn serious about this space. Groupon deal seems more defensive on Google's part than playing offense. So, essentially its not how badly Google wants Groupon, but how badly its does not want a FaceBook or a Microsoft get Groupon. To this end, $6 billion seems like the right price.
No comments:
Post a Comment