The Google-Groupon discussions have ended, presumably because Groupon believes it can realise a much higher valuation than the $6 billion offer price. However, I’m sceptical that it all came down to price. One reason Groupon may have wanted the transaction despite the valuation is:
Without Google, Groupon is in a tricky situation.
There are now mounting challenges to remaining independent:
- Groupon’s nearest competitor, LivingSocial, just joined with a major strategic partner, Amazon, received a $175 million cash injection, and likely access to enhanced consumer scale, merchant partnerships and more. The LivingSocial threat has recently been played down as new Hitwise data indicates that Groupon controls 79% of the market. However, the Hitwise numbers don’t tie to Alexa and Compete, which show LivingSocial much closer, even before the partnership.
- Google and Yahoo will likely build (or buy) competitors. Meanwhile publishers will continue to enter the space as well, and Facebook will continue to encroach via its self-serve platform.
- The list of well-positioned buyers is dwindling with Google, Yahoo and Amazon out.
Then why didn’t the deal go through? Maybe it was regulatory risk.
Google faces intense regulatory scrutiny as it continues to grow into a natural monopoly in online advertising. University of Pennsylvania professor Eric Clemons outlines Google’s current regulatory issues in “What An Antitrust Case Against Google Might Look Like“:
- Even with the appearance of competition from other search engines such as Yahoo and Microsoft in the market for sponsored search, Google enjoys monopoly power over corporations that participate in its keyword auctions. This monopoly power is especially great when Google deals with corporations whose operations are largely fixed cost, such as hotels and airlines.
- Google is abusing its monopoly position by overcharging corporations for access to consumers. These charges are passed along to consumers and ultimately result in consumer harm.
- Google is likewise abusing its monopoly position, deterring market entry in areas that would benefit consumers and damaging potential entrants.
As Google is using Groupon to cement its position in local online advertising, they are likely to undergo regulatory scrutiny by the FTC (Steve Case speculated this earlier). Should the transaction not be cleared, Groupon would find itself many months from now with an Amazon-LivingSocial partnership well underway.
If their counsel determined material regulatory risk, a solution would be for Groupon to ask for a large breakup fee. Todd Dagres, GP of Spark Capital, argues Google’s disagreement over breakup fee has stymied the deal.
Now Groupon is out of buyers.
The universe of Groupon’s potential acquirers is now very small. Even a $6 billion pricetag represents nearly a fifth of Ebay’s enterprise value, more than a third of Yahoo’s, and twice that of IAC and AOL.
What remains is Microsoft, which seems less of a strategic fit than Google, and Amazon, which is even less likely given their recent investment in LivingSocial. Otherwise, there don’t seem to be any other players that can afford to write the Groupon check, without betting a substantial portion of their enterprise value.
So expect a major capital raise/IPO (think hundreds of millions) as Groupon ramps up to face their mounting competition. In Groupon transactions going forward, they will almost certainly be the acquirers, not the other way around.
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