Groupon Turns Down Google: What Just Happened Here?

 |  Includes: AMZN, GOOG
by: Mobile Guru

News of the recent rumored blockbuster deal between Google (NASDAQ:GOOG) and Groupon now indicates the deal is dead. Whether Groupon turned them down, Google wised up or both sides wanted to go it on their own is not known at this time. One piece of information that did leak out is that Groupon is currently doing roughly $2B in deals of which they keep half, so if this is true, they are doing $1B per year in revenue and growing like crazy.

What's the real impact here? First let's consider that with any potential buyout of a company, the acquiring company looks at the deal from a make-versus-buy perspective. Or at least they should. When they look at a make, basically they are deciding, what does it cost for me to get into this business if I were to start from scratch? Do we have the resources and funding? Are there any technical barriers to entry such as proprietary software or intellectual property? Are we too far behind the curve that we cannot catch up? From Google's perspective if they had done this analysis I don't see anything that says they can't basically replicate the exact business model that Groupon has, especially now that they have probably gone through in great detail exactly how it works during the negotiations. Google has resources and funding far superior to anyone in the world. There is no barrier to entry and Groupon, with trying to buy IP, shows they have no IP of their own. Plus both Groupon and Livingsocial have basically developed their businesses in the last year and look how far they have come. Does anyone doubt Google can do it in less time?

On the buy side of the analysis Google should have looked at market share, revenues and revenue growth, profitability (although not as big a deal for someone like Google who can be patient - i.e. YouTube purchase), expansion inside and outside the US, Intellectual Property and talent. Although most people may not realize this, a vast majority of takeovers of start-ups deal with buying Intellectual Property, a Proprietary Process or the People (management and workers). The People can sometimes be considered like trade secrets. How does this company really work? So looking at the Buy side of the equation, it certainly looks like revenue and revenue growth would have stuck out if they really are at a billion per year and ramping.

The profitability side would be interesting to know. There has been a lot of speculation that Groupon is highly profitable with this model, which it certainly seems like they should be. My question is, if they are making so much money why would they want to sell it or even IPO it? There has also been a rumor about them wanting to raise more money. Why would you give away more of your company if you were making tons of money? Bottom lin,e very few start-ups make tons of money. There are just tons of costs associated with being two years old, plus expansion is never cheap. We do not know for sure but Google now knows this number. The other questions on the buy side: we know they have no IP of their own and their system is being replicated everywhere and Livingsocial is right behind them even with starting 8 months later. Finally, the last piece of the buy puzzle is the people. It wouldn't be the first time Google culture and potential companies they want to buy did not mesh very well.

My analysis of the Make/Buy part of the equation looks like Make would seem the obvious answer unless Google figured out that the market and market share may already have been determined by the time they could get to critical mass. In that case they would just be fighting to gain market share in an already crowded playing field and typically that is done by competing on cost or percentage of deal. Which Google probably would be willing to do.

So what do I think the real impact is going to be? I don't think Google is going to just give up this type of market. It fits in too well with their mobile strategy. I suspect if they don't go buy someone else, they will quickly get into the Make mode. So Groupon has basically created another competitor in their marketplace. Problem is, this one comes well funded, with unlimited resources, understands the pluses and minuses of Groupon's current business strategy (tell me that it's not important when starting a new business you know what mistakes not to make?), is willing to grab market share without having to worry about profitability and has an infrastructure already in place to handle any demand. In other words Groupon has created a monster. I hope they realize that they could have had $6B or decide to do battle with a Goliath of the internet world. Keep in mind there is only one great David beating Goliath story. If it happened very often that story wouldn't be so compelling, would it?

Disclosure: No Position