Yesterday, I came across the news that Google is planning on acquiring the group-buying service Groupon for a whopping price of approximately 6 billion dollars!
The deal is worth $5.3 billion with an additional $700 million earn-out based on performance. According to some sources, this deal is close to being completed as early as this week! If this deal does follow through, this will be Google’s largest acquisition to date, and will certainly storm the high-tech news for many months to come.
However, the inevitable question has to be asked: Is this a genius move from a marketing point of view? Or another crazy publicity stunt from Google?
First and foremost, $6 Billion bucks! Now that’s a-lotta dough to shell out for a company that was started 2 years ago no matter who you are. Not to mention that Groupon’s value increases by $20M per day, a growth rate like that is very risky similar to the flameout level of Pets.com.
However, what Google is buying is to gain the marketing exposure and to gain the customer base of Groupon. The question is whether this growth from Groupon is sustainable and whether Groupon’s asset is worth billions. Most of the asset from Groupon exists in the form of customer & client relationships, not really physical assets/capital. When I think about this value, I think about why firms are so keen on keeping returning customers rather than trying to attract new customers from the topics I learned in marketing this year. Although the immediate pay-out may be the same, but customer loyalty is what keeps the company sustainable and valuable.
Hence, this is essentially what Google is paying for, the name and brand of Groupon, its clients and customer base, its unparalleled distribution, and its business model on how it operates. Furthermore, if Google is able to integrate its advertising services with Groupon, the revenue growth that Google can generate in terms of internet advertsing can be staggering, potentially leading to a higher return from the buy-out of the initial investment of $6Billion in no time.
Having done more research on this topic, I feel that the following excerpt from Groupon’s wikipedia sums up what many are saying about this acquisition:
The buyout amount is a matter of some debate. Some analysts consider it a shrewd maneuver by Google, which is flush with cash [16], giving them access to local advertising revenue they have long coveted.[17] Others question whether the differing cultures and core values of the two companies might lead to a culture clash. [18]
To put things in perspective, I think the Groupon acquisition in many ways similar to Google’s purchase of Youtube a number of years back. At the time, there were many discussions regarding Google’s decision to acquire youtube for $1.65billion, which to many was considered too expensive.
Similar to Groupon, Google saw a potential for youtube to continue growing and become a huge asset for their internet advertising revenues, though no one could be sure how successful youtube would turn out.
It’d be interesting to see how Google handles Groupon in this case and if they will be able to benefit from this acquisition as successfully as they have with youtube.
I have also commented this at the external blog site here: http://mashable.com/2010/11/30/google-groupon-6-billion/ à see comments section under my name
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