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I continue to take a positive stance on Groupon (NASDAQ:GRPN) and with this article I will comment on the rumored takeover of GRPN by Google (NASDAQ:GOOG). The representatives of both companies, however, have declined to comment on this.

Last week I did a complete investment thesis on Groupon, which can be viewed here.

On Friday, last week, a rumor of Google buying Groupon had surfaced, which led to a 23% surge in Groupon's share price, closing at $4.69. Since the IPO last year, Groupon's stock price has fallen by more than 80%. Given the strong and innovative business model, along with a growing customer base and cheap valuations, I held the view that Groupon offers an attractive investment opportunity.

Couple of years back, before Groupon's IPO, Google was rumored to want to pay $6 billion to acquire the company. As of now, Groupon has grown in size and is valued more attractively with a market cap of almost $3 billion. If Google does indeed move ahead with its rumored offer, this is what awaits the giant in the transaction: Groupon currently has significant cash amounting to $1.2 billion on its balance sheet coupled with almost $820 million merchant payables and accrued expenses. This leaves net cash of ~$400 million for Google if it acquires Groupon. Also, we need to factor in the benefit of $600 million in form of accumulated tax losses for Google once the transaction in complete.

There is also a perception in the market that Google would not acquire Groupon as it will have a negative impact on Google's stock. This might be true for the shorter-term but not for the longer-term period as Groupon grows and delivers better performance. Currently the industry in which Groupon operates is going through a rough patch. The players in the industry are reducing their overheads and are eyeing to tap growth opportunities. The second biggest online daily deal provider, Living Social, is cutting almost 400 jobs and plans to increase marketing and mobile spending.

If the rumor of Google buying Groupon fades out, Groupon share price will drop and shares will trade in a price range similar to the range prior to the rumor. However, in the medium to long term share price will increase as I believe Groupon has a strong business model, is the leading daily deal provider with ~40 million active customers and has a large addressable market around the world. Groupon also has a competitive advantage in shape of a large sales force, huge customer base and strong merchant relationships.

Groupon entered in a multi year partnership with Major League Baseball (MLB) Advanced Media for upcoming 2013 season, and will be MLB's official daily deals site. The deals would be available on Groupon's platform "GrouponLive." This will help the company grow its revenues.

There are some investor concerns in relation to Groupon's CEO, who is seen by many as a misfit. However, there are no immediate plans to replace him. The board did meet last month to decide the fate of the CEO, but there was no decision made to replace him.

Risks
Groupon has been facing competition in the industry from Living Social, Google and Amazon (NASDAQ:AMZN) which has contracted the margins and growth for the company. One of the major reasons for Groupon's share price drop since the IPO has been competition, which has caused margins to decline.

Source: On Google's Rumored Acquisition Of Groupon