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What’s the Real Value of Groupon?

Mark Chun, PhD
Mark Chun, PhD

Early this month, Google made a buzz-worthy $6-billion bid for Groupon—the Chicago-based provider of online coupons. While this exorbitant figure seized the attention of the nation, Groupon’s founder, Andrew Mason, has rejected Google’s offer because he feels that he can continue to grow the company. The decision as to how Groupon’s executives should move forward is a topic of debate; let’s take a look at the facts.

Groupon was launched in November 2008 and in April 2010 it raised $135 million from Digital Sky Technologies, establishing its market value at over $1 billion (and increasing). Groupon is considered one of the quickest Internet success stories, purported to have masterminded the group-buying concept through its deal-of-the-day business model. The company reports revenues of more than $50 million per month with 35 million users in more than 300 global markets because of its ability to offer deep discounts (some 90 percent or more) on anything from cupcakes to department stores. Groupon obtains revenue by retaining a portion of the revenue generated by the coupons. It is predicted that Groupon’s sales may exceed $500 million this year.

So what does Google want with a coupon company? It seems Groupon’s competitive advantage does not stem from its technology; instead the company’s value stems from its unparalleled distribution model. The company has built an impressive portfolio of relationships with thousands of restaurants, services, and local businesses in hundreds of metropolitan neighborhoods. Groupon’s competitors—Foursquare, Facebook, and Yelp—all attempt to compete with the company, but none have been so successful in their efforts of target local marketing.

If Google succeeds in acquiring Groupon, it will not only be one of the firm’s largest purchases, but it is touted to provide the company with the ability to diversify and to strengthen its portfolio of competitive advantage, as it will be able to add direct advertising to local business. Google is interested in obtaining the attention and expertise that Groupon has recently established. Some industry experts project that Google wants to acquire Groupon because it wants to take its ad platform to the next level. Some may consider that a $6-billion bid for Groupon is overvalued because the marketplace may not sustain this new kind of advertising.

Earlier this year, Yahoo! also tried to get its hands on Groupon, but that bid also failed. Google, with its $30+ billion cash reserve, reportedly then offered the company $3-$4 billion in a buyout offer, but it was rejected. Google responded by increasing its bid to $6 billion. If the deal is ever accepted at $6 billion, it would mean that Groupon’s value is expected to grow more than $625 million per month or $20.8+ million per day.

So what is next for Groupon? Some consider Mason’s rejection of Google’s offer as risky, as he is putting his bets on the company’s ability to increase its valuation. Similarly, in 2008 when Yahoo! rejected Microsoft Corporation’s offer to buy it for $47.5 billion, soon after the rejection, Yahoo saw its valuation cut in half. Industry experts value the company now at $21.3 billion. At the other end of the spectrum, Facebook’s founder Mark Zuckerberg turned down an $1 billion offer from Yahoo! in 2006 and almost five years later, the social-networking site is valued at 40+ times more than the offer and boasts more than 500 million users.

Groupon could be exposed to the same outcomes (some positive and some detrimental). It is rumored that the company will decide early next year whether or not to go the route of an initial public offering instead. Mason has recently voiced his concerns about the strategic direction that the company might take under new management and what could happen to his employees if he sold to Google.

There are three leading options for how Groupon’s executives should move forward: 1) To continue to grow the company’s value, in hopes of following in the same success of Facebook, 2) to reject Google’s offer outright and to lead the company to an initial public offering, or 3) to shop Groupon to Google or other investors who might be willing to purchase the company at a lot higher price tag. What do you think they should do?

Mark Chun, PhD, is the Director of the Center for Applied Research, the Julian Virtue Professor (2008 – 2010), and an Associate Professor of Information Systems at Pepperdine University’s Graziadio School of Business and Management. He earned a PhD in Information Systems from the University of Colorado at Boulder, an MBA from the University of California, Irvine, with an emphasis in management strategy, and a Bachelor of Business Administration with an emphasis in management information systems from the University of Hawaii at Manoa.
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Mark Chun, PhD
Mark Chun, PhD
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