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I am individual investor with over 35 years investing experience. I have traded almost everything you can over that time. I prefer investing in microcaps as there can be above average rewards along with higher risk. The areas I follow very closely are: Technology, Intellectual Property, Precious... More
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  • Google looks to be winning bidder for Groupon 1 comment
    Nov 30, 2010 8:18 AM | about stocks: GOOG, AMZN, AAPL, MSFT, AOL, YHOO
    Ten days ago I blogged on who the potential candidates were to buy out Groupon. Now it seems likely that they are just a few signatures away from a deal that may go as high as $6B. I will caution as I did in the original blog that Google needs to make sure they understand the intellectual property ownership or they may want to hold back some dollars like has been seen on a number of recent deals such as the AOL/Tacoda buyout from several years ago and perhaps the Google AdMob deal over the last year.  Here is a recap of my blog from 10 days ago. Looks like Groupon is smart enough to take the money.

    Who will buy Groupon?

    Groupon who has already raised $300M is currently either considering raising more funds that would value them at over $3B or possibly selling out to a number of potential suitors. Before getting  to whom and why companies might be interested in buying out Groupon lets look at who they are and what they are really worth.

     Groupon has been around only a few years yet they are growing at an unbelievable rate. Estimates for revenues for this year range anywhere from $150M to $350M. This is up from less than $10M for 2009.  This kind of growth obviously attracts suitors but it also attracts competitors and there are a growing number. One of those, Livingsocial, seems to be roughly a year behind in its development which may very well make it a takeover candidate which could jump start its growth with the right acquirer. One of the questions that always must be asked when looking at potential competition is whether there are any barriers to entry.  At first this answer seemed to be no but recent lawsuits that have been filed seem the make this question even  more complex.  Groupon was actually sued by a company called MobGob who accuse Groupon of infringing a patent they were issued in March called “Method of Community Purchasing Through the Internet.” This, according to the patent, is “a community purchase model where a product can be purchased a particular price only if enough buyers are willing to purchase at that price.” Or, put another way, Groupon’s entire business model.

     Groupon fired back and  has filed a lawsuit against MobGob claiming prior art.  It filed a patent countersuit in Chicago federal court, using a patent it acquired that predates the founding of the company. When tech companies are sued by competitors for patent infringement, it’s common for a defendant to file a counter-suit with either a patent it owns, or one it acquires, to gain leverage. What is interesting about this lawsuit is that the patent was first filed back in 1999 and issued two years later, while Groupon is only three years old. The inventor listed is Matthew Pallakoff, currently in charge of mobile UI / UX for digital products at Barnes & Noble, and the company that the patent was assigned to is MobShop. Groupon acquired this patent to protect themselves against these types of patents and claim they have no plans to use to against other competitors.

    Of course valuation also must be looked at from the point of view of the acquirer such as Google. When Groupon was mentioned on Oprah they received such interest they literally crashed their site. That would never happen inside a much larger company who could handle all these possibilities. They also are much more likely to be able to expand this business through cross licensing of other services and could quickly turn this into a billion dollar business.

     
    Besides Google there is also a rumor that Yahoo was interested in making an offer. While I think this is a plus for Yahoo I don’t see them being an eventual winner in a bidding war.  Plus they don’t seem to add other cross marketing opportunities and I am not sure they could come up with $4B in cash to satisfy all the current owners.

    Amazon is also a rumored a potential acquirer and they are a very intriguing possibility. It seems to me they already have a solid infrastructure in place to help with expansion. Plus possible cross marketing possibilities seem endless and financially they could do a deal in cash and stock with no issues.

     Other companies that I am sure are looking but have not been linked in the press would be Apple and Microsoft. Apple is a natural to take the business and make it into another iTunes. Microsoft does not seem to understand how markets like this can be developed. Both have enough cash to buy anything they want.

     So does Groupon get bought out? If I was them and somebody offers $4B for a company that is doing $150-$350M I would say take the money. The fact that there really is no barrier to entry and competitors are popping up all over means growth and margins will start to slow down. Not right away but eventually. Being inside a much larger company will allow them more opportunities plus there will be consolidation coming in the future anyways. Plus companies like Groupon who have only been around a few years have no Intellectual Property other than what they buy from other people. Seems they already understand this with the IP they have already acquired but my guess there is a lot of other IP they are lacking. This leaves them very vulnerable to future lawsuits which they will be somewhat protected from inside a much larger company. Plus once they sell out there is really no issues other than counting their money.



     


    Disclosure: No Position
    Themes: Online, retail, mobile Stocks: GOOG, AMZN, AAPL, MSFT, AOL, YHOO
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  • Author’s reply » Wrote a new article now that the deal did not go through.
    4 Dec 2010, 01:05 PM Reply Like
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