Google may be on the verge of clinching its biggest deal yet with a reported $5-billion bid for Groupon, the fast-growing company that is blitzing the Internet with daily coupon deals.
The purchase would extend Google’s dominance in online advertising, helping it gain local business dollars to fend off surging competition from Facebook Inc., which rolled out its own deals initiative last month.
Groupon sends its subscribers daily e-mails offering 50% to 90% discounts on products and services, such as spa treatments, fitness classes and restaurants. The daily bargain — a $40 pedicure for $20, for example — must be purchased upfront and is good only if a minimum number of people buy it, encouraging them to recommend the deal to friends.
It has proved to be a monster business. In just two years, Groupon has staked claims in more than 300 markets worldwide and has more than 33 million subscribers, making it one of the fastest-growing companies in history. It has succeeded in a lucrative area coveted by major Web companies: reaching shoppers where they make the bulk of their purchases.
Local advertising will reach $133 billion in the U.S. this year, according to BIA/Kelsey, a consulting firm. Much of that advertising spending from small businesses has been slow to migrate onto the Web, but Groupon has been successful in getting millions of merchants to try out its daily deals — in part because they can see the money flowing in immediately.
Groupon takes a cut of each deal, usually 50%. It does not disclose its finances, but industry analysts estimate that its sales fueled by bargain-conscious consumers will surpass $500 million this year. The already profitable company, which has raised a total of $170 million, had a valuation of about $1.3 billion in April after Russian investor Digital Sky Technologies led an investment in Groupon.
Neither company would comment on the proposed acquisition, which has been the subject of speculation for several weeks. But the talks are in advanced stages, according to people familiar with the situation who were not authorized to discuss the matter publicly.
It’s also still possible that Groupon would choose instead to raise more money from investors at a valuation of more than $3 billion. The website All Things D first reported that Google had offered $5.3 billion for Groupon, plus incentives if it meets certain performance targets.
But it’s not without risk for Google. Groupon’s business has been widely copied by rivals, and shoppers are fickle: They could switch their allegiances to a competing deals site or develop deal fatigue as they are increasingly bombarded by Groupon clones.
Lou Kerner, a social media analyst at Wedbush Securities, said he’s betting that Groupon has staying power.
“What we’ve seen is new businesses on the Internet can emerge and be immensely valuable. Quite often, the first company in these kinds of new and emerging fields on the Internet gain market share and continue to be the leaders,” he said. “There’s every reason to believe that Groupon will continue to grow and continue to command significant market share.”
Advertisers are eager to target consumers based on their location and increasingly are able to do so with the rapid adoption of smart phones that can receive coupons or special offers when people are near stores, bars, movie theaters and restaurants.
Groupon has been the darling of the advertising and marketing world, which company President Rob Solomon discussed in a recent interview with The Times.
“I think it’s game changing from an exposure perspective; I think it’s game changing from an advertising standpoint,” he said. It’s also “very disruptive to the traditional local advertising model. Those don’t work so well anymore.”
Despite Google’s success in selling text ads that accompany search results, it has missed out on online coupons that are influencing how people spend money offline.
That may help explain Google’s apparent willingness to pay billions for Groupon. An estimated 42% of in-store sales are influenced by online research, but only 7% of purchasing takes place online, Susan Wojcicki, Google’s senior vice president in charge of advertising products, said at a recent conference. Investors may be less certain. Google shares slipped 4.5% Tuesday over what analysts said was concern that the price tag may be too hefty.
“Google’s got the cash to spend, and Groupon is one of the few properties worth hunting,” BGC Partners analyst Colin Gillis said. “If Google buys Groupon, we will have to wait and see if it’s worth the premium Google has to pay.”
If it happens, the deal would eclipse Google’s $3.1-billion purchase of DoubleClick in 2007, which is its largest to date, and would be far more than the $1.65 billion Google paid for video-sharing site YouTube the year before.
Groupon’s local deals have attracted interest from major retailers, such as Gap and Nordstrom, that are looking to get shoppers into their stores. But its growing influence with small businesses would be of particular interest to Google, which has tried to draw in these merchants that often don’t advertise on the Web.
For years Traxx, a contemporary American restaurant inside downtown L.A.'s Union Station, rarely advertised, instead preferring to do a “word-of-mouth-type thing,” general manager Barrett Kime said.
But Groupon changed that. The restaurant has offered certificates on the daily deals site twice, most recently in September, when it sold Groupons for $50 worth of food for $25. That deal netted more than 800 purchases.
“We’re trying to become part of the new age on the Internet and Facebook and all that stuff, and Groupon is kind of the cutting edge of that,” he said.
The prospect of a Groupon-Google marriage cheered Groupon user Katherine Park of Beverly Hills, who hoped the financial might of the Internet search giant would lead to better deals.
“I think restaurants and stores would want to participate more if Google was involved,” she said. “Google has its hand in everything.”