Google expected to buy or eclipse Groupon

Groupon reportedly rebuffs Google's acquisition bid, stirring up hornets' nest

Groupon may have just stepped on a hornets' nest.

The localized deal-of-the-day Web site reportedly turned down Google's offer to buy the Chicago-based business. As recently as late last week, word was that Google and Groupon were in advanced acquisition negotiations. Various reports even had Google offering as much as $6 billion for the 2-year-old company that has generated so much buzz.

So with this deal reportedly in the trash, there seem to be two options for Google , according to industry analysts. Google, with its deep pockets and hefty clout, either will take another run at acquiring Groupon, or it will develop its own Groupon-like service and eclipse what would then be its competitor.

"Groupon would have been a nice feature to add to Google's portfolio of social network-like assets, but it's not mandatory that they have this Groupon," said Dan Olds, an analyst with The Gabriel Consulting Group. "In other words, there are plenty of ways to skin this particular cat, and Google has the reach and creativity to come up with a different route to connect customers to sellers in innovative ways."

There has been a lot of excited talk around Groupon, which helps businesses reach directly out to individual customers. Groupon is designed to e-mail users with information about what to do in their cities, along with bargains and sales offers.

Augie Ray, an analyst with research firm Forrester, said part of the problem with Google's attempt to buy Groupon may lie with the fledgling company's valuation.

"It's difficult to assess the value of Groupon without knowing more about its finances, but many questioned the $5 billion-plus valuation for a two-year-old company that was valued at under $1.4 billion eight months ago when it raised its Series C funding," he noted. "Estimates of its revenue vary wildly, with some reports indicating it will hit $500 million this year, and others reporting Groupon is on a $2 billion run rate. Either way, those are amazing figures for a two-year-old company, which is why there's so much buzz around Groupon."

Hadley Reynolds, an analyst with IDC, pointed out that there are a lot of changes hitting e-commerce right now, and Groupon is part of this new equation.

One of those changes is that online sales are increasingly locally focused.

For instance, just last month, Yahoo, in an attempt to regain some of its past online glory, announced a new service called Local Offers that it said will give users information about local merchants along with coupons and information on deals at stores in their neighborhoods.

Groupon, meanwhile, has been focusing on localized retail, much to its advantage.

"Groupon is a standout example of how the social Web is offering new opportunities to re-engineer old marketing and advertising models," Reynolds said. "Given the price tag rumored in the press, Google apparently was betting that Groupon could become a category killer, like YouTube, and give them another dominant franchise."

Reynolds added, however, that how successful Groupon becomes depends largely on whether new competitors find that special sauce and out-race Groupon to the retail finish line.

Google needs a service like Groupon - whether it's the actual Groupon or a competing service - for market domination, said Rob Enderle, an analyst with the Enderle Group, and that means Google will get that kind of service one way or the other.

"Google will likely go build a Groupon clone now based on what they have learned," he added. "Groupon doesn't have the resources to compete against Google if Google ramps up. And unless they find another big buyer, they are likely to feel a bit like Yahoo did after blowing off Microsoft. Self-screwed."

Olds noted that Google might not have to build its own service because of its deep pockets.

"I'm not convinced that this deal is completely dead. I think it's only three-fourths dead," added Olds. "Google might take another run at them. We're also going to see a slew of competitors emerge in the coming months -- all of whom would probably be more than happy to be acquired and become part of the Google machine."

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin or subscribe to Sharon's RSS feed . Her e-mail address is sgaudin@computerworld.com.

Copyright © 2010 IDG Communications, Inc.

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