Sources: Groupon rejects Google’s offer; will stay independent

http://chicagobreakingbusiness.com/2010/12/sources-groupon-rejects-googles-offer-will-stay-independent.html

by zone411 • 16 years ago

90 118 16 years ago

zone4113• 16 years ago

I think this a bad move by Groupon. I don't think they have the critical mass yet to win over potential competition from Facebook or Google plus its AdSense network. I see their margins getting smaller. If the numbers that were quoted by the press were correct, it seemed like they had a good offer on the table.

drgath4• 16 years ago

A $5 billion buyout for a company with $2 billion revenues is not a good offer.

zone4113• 16 years ago

I saw this $2 billion number in one report, but nothing close to it in the others. I hope this one report doesn't count gross merchandise sales as revenue. Anyway, EBITDA would be much more relevant and I didn't see anyone claim that it's close to $2 bil.

phillian2• 16 years ago

Groupon could have taken a lesson from my grandma:

"A bird in the hand is worth two in the bush."

$6BB today invested in AAA bonds for ten years will be more than their corporate valuation after their deal hawk coupon site's novelty wears off. Eventually Facebook, Twitter or Google will create better 'hyperlocal' business models and monetize the long tail of local search with their massive reach.

Good luck bros.

ecuzzillo2• 16 years ago

a) I thought the whole AAA thing had been found to be bankrupt? (Honest confusion.)

b) How many companies who turn down seemingly-huge acquisition offers turn out later to be 'just' whatever they were doing at the time of the offer? Most startups at any stage don't stay fixed at doing 'just' whatever they're doing at that stage.

maxnucci• 16 years ago

"A bird in the hand is worth two in the bush."

And said bush is surrounded by a ring of fire. And explosives. And zero humidity.

Regardless, we don't have all of the data - hard to tell from outside

chunkbot5• 16 years ago

True, we don't have all the data, but we do know that those two bush birds are already producing millions of dollars in profit a week.

chunkbot5• 16 years ago

Ten-year Treasury yield is 3%. $6 billion invested today for ten years would return $8 billion. Their valuation could be several billion more than $8 billion in less than 2 years. You might be right about the coupon sites being a novelty, or maybe Facebook, Twitter, or Google (or, some as yet unknown competitor) will "monetize the long tail"...

But... the founders, employees, and other insiders of Groupon have already been handsomely paid off. For them, the chance at several billion dollars more in a few years time is worth the risk of rejecting the Google deal.

vaksel• 16 years ago

idiots...2 years from now, when all the businesses know what a bad value proposition Groupon is, they'll look back and kick themselves for not taking the offer

drgath4• 16 years ago

With $2 billion revenues that are likely to continue increasing YOY, it looks like an embarrassingly low offer.

http://kara.allthingsd.com/20101203/exclusive-groupon-annual...

phillian2• 16 years ago

"Likely to continue increasing YOY"? Says who? Groupon?

At least one compelling academic argument why Groupon's 'deal hawk' business model is not built for sustainable growth:

http://docs.google.com/viewer?a=v&q=cache:cpoGFpYf78oJ:w...

csomar• 16 years ago

Only the future will tell if it's a smart or stupid move. I think the article don't give an in-depth knowledge about the acquisition, thus, since we don't know the ins and outs, we can hardly decide/predict.

I also thought that it was a good offer, however, when I read that their earnings are at $2Bn and they have 3,000 employees.. that's already huge. They might have bigger plans, they know better the market and if they can double or triple their profits.

drgath4• 16 years ago

"$0.5Bn"

(Allegedly) That's just per quarter. So x4.

dporan• 16 years ago

Does anyone remember PointCast? In 1997, they rejected an acquisition offer of $450 million from News Corp. Two years later, they sold the company for $7 million.

http://en.wikipedia.org/wiki/PointCast_(dotcom)

Google's reported multi-billion dollar offer for Groupon seems like a pretty good deal for the company's founders, investors, and (presumably) employees.

ojbyrne• 16 years ago

Funny, the instant I read the headline, Pointcast came to mind.

j_baker4• 16 years ago

Does anyone remember Facebook? In 2006, they rejected an acquisition offer of $1 billion from Yahoo. Four years later, they're clearly a juggernaut of social networking.

http://en.wikipedia.org/wiki/History_of_Facebook#Financials

c23• 16 years ago

You could probably take your pick of overvalued companies from the 1997-1999 dot com era. Even if we are in another boom period, Groupon has the revenue, growth, P/E, and market potential to justify the high price tag, unlike it's boom counterparts Twitter and Facebook.

If Facebook and Groupon both IPO'd tomorrow, something tells me Groupon would have the higher market cap, and without looking at numbers, my hunch is it would be the better long term investment too.

Remember, Facebook is already over the uncanny valley - they have 500 million users, and starting to enter a saturated market. Groupon is still relatively small and has a long way to grow.

SriniK2• 16 years ago

well said but these deals tend to be more complicated than just the figures. google might have put in the conditions or groupon might have their own wishes.

When they raised money last time, most of the decision making folks(founders and such) cashed out already with $160M http://techcrunch.com/2010/04/15/the-rest-of-the-details-on-... So they are not in hurry

Looking from google's point of view, not sure how they would have answered their investors. 500M revenues -> 150M-75M income(assuming 30%-15% profit margin) http://www.businessinsider.com/what-are-groupons-real-number... that is a 12x - on revenue and 40x - on income. Just doesn't make sense.

LiveTheDream• 16 years ago

It's been reported[1] that revenue is actually $2 billion, not 500MM.

[1] http://kara.allthingsd.com/20101203/exclusive-groupon-annual...

zhyder• 16 years ago

GOOG itself has a P/E of 23x [1]. 40x for a fast growing company is not crazy.

[1] http://www.google.com/finance?q=goog

mogilny3• 16 years ago

as some of the people already mention, numbers were "leaked". There are too many incentives to make up sources (page views, manipulate google share price, to solicit more bids...)

revenues numbers are meaningless if you don't see the books for yourself. For example, a company can give 10 dollars to all new users. If this company has 35 million users, and takes in 30% of each transaction, that's 105 million dollars in revenues it can report. We wouldn't know.

frisco2• 16 years ago

Comments like this reflect more on their author than the startups and management teams they're about. Have you ever been inside a startup, and seen how one one-thousandth of the relevant information ends up in the press, and even then it's distorted? We don't even have more than rumor that this deal exists -- that should hint to you the quality of your information. These players aren't stupid. You have no idea how much you don't know here.

SRSimko• 16 years ago

I would agree the devil is in the details because from the outside this doesn't seem to make sense.

risotto• 16 years ago

Amen.

aarlo• 16 years ago

A lot of the talk is from people who (should) have low confidence in their predictions. Meaning, there's a 80% chance this is bullshit, but hear my out anyways.

Yes, many of the facts are wrong. The conclusions are wrong. So why should we still discuss?

First, it's fun. Like a sport for us to watch (and some to play :).

More importantly, though: Forcing yourself to open your eyes, stay engaged and keep an active mind about what's going on in the world. To practice thinking things through, even with limited information (you'll never have 100% information). This encourages curiosity - so you get more involved, ask questions, do research. Overall it helps you learn how the world works.

keltex• 16 years ago

Maybe part of the problem is that they are in Chicago. Seriously. They aren't in the Silicon Valley ecosystem which if they were they would know that there are tons of scary smart people at well funded startups working lots of projects in their space. That might make they realize what they're up against.

chollida1• 16 years ago

I don't think a company needs to be located in the valley to know that there are "tons of scary smart people at well funded startups working lost of projects in their space"

j_baker4• 16 years ago

There are lots of scary smart people all over the world. True, there are more scary smart programmers in SV. But that doesn't mean companies can't find them elsewhere.

chunkbot5• 16 years ago

Your analysis is wrong; here's why. The founders, employees, and other insiders of Groupon have already been handsomely paid off. For them, Groupon represents a free option. If it sells for $6 billion, great! But what if in 12 months it could be worth $10 billion? That's $4 billion more! And, compared to a site like YouTube, Groupon looks like a much more stable deal. They're already immensely profitable (something YouTube never was, and still isn't). The $5.3 billion offer, as a multiple of revenue and profit, was a surprisingly cheap offer for Groupon!

Maybe Groupon will look back in 2 years with regret. Or maybe they'll have an offer of several billion dollars more. For the people in the position to make the decision, the risk is worth it.

Do you know somewhere else with as good a chance as Groupon of making several billion more dollars in a year?

meric• 16 years ago

I agree with you but your rhetorical question isn't right. If you're Gates with several dozen billions, it is trivial to "earn several billion more dollars"; But if it means I have a 50% chance of losing 10 billion and 50% chance earning 7 billion I wouldn't do it.

The same goes for groupon; From the outside it looks like the founders are risking their entire 5.3 billion for a mere 100% increase in a couple of years time. Of course, like other comments say, we know very little; but I do concur with the original comment saying it looks crazy.

erikpukinskis• 16 years ago

TechCrunch reported they'll do 50m in profit this year, so it's not exactly cheap. If they were to stop growing it'd take 100 years for Google to get their investment back in cash.

The question is when they'll stop growing.

ebun• 16 years ago

Can you (or anyone) elaborate on "The founders, employees, and other insiders of Groupon have already been handsomely paid off."? My understanding is that the handsome payoff comes when the company is either bought out or IPO's

brianlash• 16 years ago

I bet you said the same thing about Facebook when it rejected that $1B Yahoo bid 4 years ago.

hugh33• 16 years ago

I did, actually, which is why I no longer trust my own opinion on these things.

jonmc12• 16 years ago

On the surface, Groupon probably is not that bad of a deal for businesses compared to the cost of acquiring customers through local advertising. The problem is that businesses get a bunch of customers who buy once, and go away.

That's not a great value proposition for every business, but you would be surprised how many local businesses would take these deals any day of the week. Groupon will find its sustainable niche of businesses to work with, the bigger question is whether consumers will continue to flock to those particular deals.

dbrannan3• 16 years ago

I used to think the same thing when FaceBook rejected a billion dollar offer from Google, I believe. Boy, was I ever wrong!

elvirs• 16 years ago

was not that Yahoo?

tzs• 16 years ago

I'm curious if you had the same opinion when they reportedly turned down a three billion dollar offer from Yahoo.

vgurgov• 16 years ago

LoL )) i wish somebody call me idiot for refusing 6B deal. who are you to judge? dont u assume they know something you dont? all i can say these guys have balls to make such decisions.

grandalf• 16 years ago

Can anyone make the case for why this was a smart idea? The only argument I can think of is that the founders would rather continue the fun of growing their own business rather than having to hand it over to Google right at the peak of its hype.

blantonl3• 16 years ago

I've pursued many acquisitions and I can tell you from experience that your assertion of "continue the fun of growing their own business" is pretty strong for a lot of founders.

Contrary to popular belief, the exit from a startup isn't on the minds of a lot of innovative people.

[edit: spelling]

slouch• 16 years ago

but! sure, an early exit would be a tough decision if you already have FU money--but what about 6 billion dollars? you're talking about being unconditionally in love with what you are doing in this particular business to pass on 6 billy.

qeorge• 16 years ago

The founders are already going to be super-rich. This isn't Twitter, Groupon is already profitable and raking in the dough.

That gives them the freedom to ride this thing out and see where it goes. Truckloads of money are great, but this is a chance to build a legendary business.

edanm• 16 years ago

"The founders are already going to be super-rich. This isn't Twitter, Groupon is already profitable and raking in the dough."

Is there any chance that the founders of Twitter aren't going to be super-rich? Even if in 2 years Twitter is completely gone, I'm guessing that the founders are already incredibly wealthy.

sachinag• 16 years ago

This was smart. Let's be clear: Google needed Groupon's local advertising smarts more than Groupon needed anything from Google. It's not like free AdWords would change the limiting factor on the Groupon model - the limiting factor on the Groupon model is the speed with which Groupon can add cities and salespeople: two things where Google can't help one iota. And, to date, Groupon has shown an ability to expand faster into new cities/countries than LivingSocial and all the also-rans.

I also don't think group buying is going away in, say, 20 years. It's such a ridiculously perceived risk free way (no cash upfront? fuck yeah) for local businesses - really, any businesses - to get additional visits/customers that it'll be a part of the marketing mix forever.

slapshot2• 16 years ago

> Google needed Groupon's local advertising smarts more than Groupon needed anything from Google.

Except cash.

This was by far the best possible hope of returning money to the investors and shareholders. Their fiduciary duty is to return money to investors. They failed.

It was an absurd home-run valuation that any venture firm would be happy with. And they are all but begging Google to compete head-to-head. Remember that Google knows everything about you already (Gmail, Google Checkout, Google Maps...); it would be easy for Google to target a buying service not only to your city, but also to your exact buying habits.

frisco2• 16 years ago

Groupon isn't a personalization play; it's an anti-personalization one. Literally the deals only happen if many people want them. While interesting and valuable, incredibly detailed targeting is kind of tangential.

blantonl3• 16 years ago

>> it was an absurd home-run valuation that any venture firm would be happy with

If that is the case, then why aren't the investors screaming bloody murder?

drgath4• 16 years ago

"Except cash."

Like Twitter & Facebook, they have access to all the money they could ever want. Plus, Groupon's revenues are through the roof right now, right on par with Facebook's.

rprasad• 16 years ago

Management's fiduciary duty to a company's shareholders is to protect the shareholders' investment. The duty is not about "returning money". If it was, then dividends would be mandated any time a company saw profit, and management would always have to accept buyouts returning even the slightest iota of gain.

sdrinf• 16 years ago

> [..] they are all but begging Google to compete head-to-head

Except for the part where Groupon provides an amount of hand-holding for businesses, that G has neither history, nor reputation of doing.

Historically relevant datapoints: G has both a buying service[1], and an affiliate network[2], neither of which seems anything remotely close to the success that Groupon is enjoying already.

[1] http://www.google.com/prdhp?hl=en&tab=wf#t:0

[2] http://www.google.com/ads/affiliatenetwork/

c1utch• 16 years ago

Google can implement their self-serving ad platform technology (AdWords) to automate the 2,500+ person sales force that works at Groupon. Groupons profit margins would skyrocket.

c23• 16 years ago

I see a similar sentiment in this comment section that I saw around the time Facebook rejected the 2 billion acquisition offer from Yahoo.

The fact is, this company has executed well enough to reach a large revenue number very quickly. It's easy to say if you don't work there that they should have sold, but putting myself in this company's shoes, I think their growth potential is actually much higher not being a Google subsidiary.

earl3• 16 years ago

Yeah, but where's their moat? Contrast to FB -- the value of the network increases as more people are in it. How does groupon build a moat? Just because more people groupon, does it make competitors less valuable? Is it a barrier to have emails from livingsocial and groupon arriving in your inbox every day? Groupon is almost the complement of fb -- fb had huge lockin, but no obvious monetization method. Groupon has obvious monetization, but no lockin that I can see.

I also question in the long run how many businesses have large enough customer LTVs that selling stuff below cost is worth it to hook customers. Hearing from eg hair salons that groupon people aren't customers but are bargain hunters isn't promising.

My prediction -- in 3 years, groupon will regret this if they haven't found a different sucker. Maybe comcast?

I'd be happy to be wrong -- it's always awesome when people succeed.

browser411• 16 years ago

Groupon has a great network effect. They have 25MM users and tens of thousands of local businesses. It's not as good of a moat as FB but still damn nice.

Also, I'd argue that FB has a very obvious monetization: advertising. They supposedly generate $1B+ in ad rev.

revorad2• 16 years ago

What's Amazon's lockin? Apple's moat?

The fact that a zillion Groupon clones are springing up shows that this market is HUGE. Lockins, moats don't matter.

Regarding customer satisfaction, if the majority are happy then it's OK. The CEO quoted 98% customers being happy in a recent interview. So the few unhappy stories you hear are probably anecdotes.

Groupon may itself not be a social network, but it knows how to use the power of existing social networks.

You don't necessarily have to be a software company to be a big sustainable business on the web. Web infrastructure and social networks are now commodities, and the most creative businesses will make a lot of money utilising them.

ookblah• 16 years ago

all you people calling them idiots, did it not cross your mind that they may just enjoy running the business as it is and don't care for the massive payout?

as long as they are making good margins they can do whatever they want.

zone4113• 16 years ago

They had multiple founding rounds. I doubt it was people actually running this business day-to-day making this decision.

hugh33• 16 years ago

The people I feel sorry for are not the founders, who are going to be rich whatever happens, but the early employees who might have wound up rich immediately with a Google buyout, but now have to face ongoing uncertainty.

dbrannan3• 16 years ago

I don't feel sorry them at all. Not one little bit - it's a job, you work, you get paid, life is good.

Who I feel sorry for is people who are not employed and are trying their best to keep their heads above water.

jfb• 16 years ago

Balls of brass.

mogilny3• 16 years ago

brains of ass

inscitekjeff• 16 years ago

Another damn student of the Jerry Yang school of acquisitions. #fail

nwmcsween• 16 years ago

I really hope they understand that a large in use medium such as google itself or facebook will simply clone functionality of groupon and tweak it for it's user base ultimately killing groupon. Groupon has no 'stick' some person in rural anywhere won't have a clue what groupon is or will use it but will know what and might use google or facebook, and that's what counts - worldwide recognizability with everyday use.

duffbeer703• 16 years ago

That CEO guy looks as douche-y as the Facebook guy.

krosaen• 16 years ago

Whether or not this pans out, I'm happy to see someone hold out on an acquisition. someone has to resist the temptation of an acquisition to be the next huge thing, and this means groupon has a chance at being the next 100 billion dollar company. Plus, there in the midwest!

ecuzzillo2• 16 years ago

Honest question: How many companies have had multi-billion dollar acquisition offers from large public companies and then NOT gone on to have valuations much higher than the offer? Obviously the ones off the top of my head-- Google, Facebook, whatever-- could be entirely survivorship bias.

Even so, my instinct when reading this article is that Google was stupid not to double their offer, assuming they were going to be competent enough not to ruin Groupon once they bought it.

uptown• 16 years ago

Groupon just earned themselves massive exposure. The media coverage of these negotiations elevated their profile beyond their existing user-base and solidified their reputation as the preeminent group-buying site.

phodo• 16 years ago

another plus for rejecting the goog: if groupon continues on and goes public / stays independent but super-profitable, then there is one more company that can serve as acquirer to all the great stuff produced from this community and others, especially ecommerce type startups. more fat wallets as acquirers = goodness all around for hacker news and friends. just sayin.

taphangum• 16 years ago

Groupon has just missed their bebo moment.

mcarrano• 16 years ago

I feel Groupon has had great success so far due to the economy.

Businesses are looking to make any kind of money while consumers are looking to save as much as possible. Groupon offers this to both users.

I spoke to a family friend that owns a restaurant and ran a Groupon offer, they are less than pleased with how it turned out. Never have they seen so many "customers" come in and not leave tips for their waiter/waitress and none are repeat customers.

uberuberuber2• 16 years ago

For a company with no unique technology or equipment to turn down an offer that ranks them as a mid-cap company is mind boggling to me.

Delta Air Lines has a market capitalization of 10B! And they have 725 freaking jets!

Dr. Pepper has a market cap of 8B! And they have the pepper song!

CarMax has a market cap of 7B! And they have fleets of cars!

uberuberuber2• 16 years ago

And almost more than the GDP of the The Bahamas (7B)!

apinstein• 16 years ago

No doubt, Groupon prints cash. However, as far as I can tell (and I have actually done significant research and thinking about this type of business) they are far more lucky than anything else.

Not to say they didn't execute well, clearly they did, but there have literally been hundreds of companies both before (restaurant.com, 1999, val-pak, Entertainment Book) and after (Facebook, Google, Yelp, FourSquare, AOL, LivingSocial, DailyCandy, Zip2Save, + thousands you've never heard of) doing nearly or exactly the same thing.

IMO Groupon was indeed crazy to pass on this deal. I agree with others saying that there is a high risk that they will be worth far less in a few years.

Why?

Their model is not strategically defensible, and there are very few barriers to entry. Look around, anyone with a mailing list or customer base is entering the deals space.

Besides that, in the end, Groupon makes money by giving away other people's money. It's great work if you can get it, but this type of business gets very hard to scale past a certain point. While it's great for certain kinds of businesses, it also incites a race to the bottom. I think that over the next few years businesses will get wise to the model and revert to more sustainable discount levels for the majority of situations.

In the meantime Groupon will continue to print cash but in the long run there will not be one winner in this category, it will end up very fragmented and very competitive (read: high costs and low profit margins).

puredemo2• 16 years ago

You've summed up precisely what I haven't been able to put into words about this.

seunosewa2• 16 years ago

"Besides that, in the end, Groupon makes money by giving away other people's money."

You mean like Adsense?

anigbrowl• 16 years ago

Lucky escape for Google if true. This is not the long term shopping model you're looking for.

Abid• 16 years ago

Something to bear in mind: these Groupon guys are some pretty business savvy dudes. They've started several very successful companies in the past and likely have a very good idea of where they're going with this. I wouldn't dismiss their rejection so hastily.

okeumeni• 16 years ago

You're making a mistake Groupon!

mkramlich2• 16 years ago

Rule of thumb I have: never never never never never ever turn down a $6 billion buyout offer. (If I don't already have FU money in the bank.)

So much about software buyout valuations is based, directly or indirectly, on speculation and fads that you're taking a huge gamble to turn one down.

mlinsey• 16 years ago

I'm not sure if this is the decision I would have made if I were on Groupon's board, but as an outsider I am delighted to see this, because now we get the chance to see if Groupon transcends being a mere coupon site and succeeds at fundamentally changing the nature of commerce. How they grow into new areas and defend their (from the outside, apparently) vulnerable turf will be fascinating, and as an entrepreneur there will be a lot more to learn from the Groupon story watching them be independent than seeing them become part of Google.

jdavid• 16 years ago

Does anyone else think this dance was just to get a baseline valuation from a serious buyer before they IPO'ed?

It seems like there is too much resolve in this decision to pass.

olalonde2• 16 years ago

I don't get why Google doesn't simply clone Groupon. The barrier to entry seems very low and I can't imagine how they couldn't replicate their business for 5B$.

olalonde2• 16 years ago

You know what's cooler than six billion dollars? Nothing, you idiots, take the money.[1]

[1] http://twitter.com/#!/DavidKaneda/status/10857535430983680

asianmack• 16 years ago

Just read this to understand why.

http://37signals.com/svn/posts/1927-the-next-generation-bend...

ck2• 16 years ago

The photo on that article is surreal.

Looks like a smug teenager in a t-shirt surrounded by old men in suits, grinning (at how much money he's making them?)

Sources: Groupon rejects Google’s offer; will stay independent

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