My notes as I explore various business and financial topics

Tuesday, April 26, 2011

Giants Google and Facebook join the group discount coupon market

Ever since Groupon turned down their 6 billion dollar acquisition offer, we were wondering what Google's next move would be.  It was inevitable that they would enter the market, either by buying a major Groupon competitor, such as LivingSocial or by starting their own service, now in beta as Google Offers.  Now Facebook as jumped in with Facebook Deals, which offer discount coupons in five cities (San Francisco, Austin, Dallas, Atlanta and San Diego).

Prior to this, some business school friends and family were discussing whether or not Groupon's IPO would be a good buy.  We divide into two camps: those that thought Groupon would continue growing, making it a great investment opportunity, and those that felt they would struggle with market share. Indeed, with the low barrier of entry in the discount coupon market, it seem like a new competitor sprouts up every week. With two biggest on-line companies joining in, things will get very interesting.

Groupon famously turned down a 6 billion dollar acquisition offer from Google in December 2010. While at first glance, Groupon's founder and board appear mad to do so, closer inspection reveals the rational of their decision. Some of the reasons why Groupon said no to Google are:

  • Groupon has a yearly revenue of 2 billion, making the 6 billion dollar offer a paltry 3x yearly earnings.
  • Despite their numerous competitors, Groupon still has 70% of the market
  • Groupon is experiencing fantastic growth with revenue increasing from 500 million to 2 billion and an increase from 400,000 to over 40 million email subscribers.

Yet, with powerhouses Google and Facebook posing a serious threat to Groupon's future growth and market dominance, can Groupon can compete?  If  they can hold their own, this may actually prove beneficial, as the big players reduce number of competitors.  Or they may accept another acquisition offer.  I can imagine a company like eBay trying to join in by buying up Groupon.  Or perhaps, their will merge with Livingsocial.  It definitely will be interesting to see what occurs.

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