Every so often in the land of high tech, a large merger or acquisition is assigned epochal significance, as if it marked a geologic shift under Silicon Valley. The AOL-Time Warner (TWX) merger in early 2000, which ultimately evaporated some $200 billion in shareholder equity, was soon seen as the gateway to the dot-com bust. Six years later, Google's (GOOG) $1.65 billion purchase of video sharing site YouTube supposedly put the Valley back on track and ushered in the Web 2.0 boom.
Even failed buyout attempts, it seems, can be portentous. On Dec. 3, news began to spread that Groupon, a website specializing in local shopping deals, had rejected a staggering $6 billion buyout bid from Google—and an army of tech analysts, bloggers, and tweeting entrepreneurs has been deconstructing the snub ever since. According to these armchair observers, the spurned marriage proposal marks either the creation of a new tech bubble (is it Bubble 2.0 or 3.0?), the emergence of a new strain of entrepreneurial hubris, or a surging faith in the long-awaited return of the initial public offering market for risky but rapidly growing new Internet companies. Or all three.
What no one disputes is that the Chicago startup, just two years old in November, has discovered a novel method of local advertising that shows a remarkable level of profitability and revenue growth (an estimated $500 million a year and counting). Groupon sends out a daily e-mail to 35 million subscribers in more than 300 cities around the world. It has a staff of around 3,000, including many phone jockeys who sit in a Chicago warehouse and entice local businesses to offer steep discounts on their wares in exchange for driving more foot traffic to their stores and perhaps snaring new customers. Then a cadre of writers, many with backgrounds in stand-up comedy, uses piquant prose to describe discounts on everything from pastries to spa treatments to flying lessons—typically one deal a day in each market. When enough people sign up for a given deal, Groupon splits the revenues 50-50 with the local business, and everyone seems happy. "We think the Internet has the potential to change the way people discover and buy from local businesses," says Andrew Mason, Groupon's 30-year-old chief executive officer, who went from playing in a Billy Joel tribute band to counting his millions in a few years. "What we've done so far at Groupon is just the beginning."
Groupon's rejection of Google's $6 billion—a number worth repeating, since the search giant's previous largest acquisition was $3.2 billion for DoubleClick, in 2008—is as polarizing a move as Silicon Valley has seen in recent memory. (Neither would comment on or even acknowledge the unconsummated transaction.) Groupon's business model, skeptics argue, requires no special technology and is too easily copied for the young company to flourish for long. "You can set up your own daily deal website in an hour," says Ira S. Weiss, a professor at the University of Chicago Booth School of Business. Rival startups include Tippr, based in Seattle, and Amazon.com-backed (AMZN) LivingSocial, based in Washington, D.C. Among the more established players are review site Yelp and restaurant reservations king OpenTable (OPEN). Casting even more uncertainty on the market, local businesses are likely to take advantage of this competitive heat to pressure deal sites to cut their commissions. "I would have taken that $6 billion in a heartbeat," says Paul Kedrosky, a venture capitalist and Bloomberg.com contributor. "I would have been knocking over random strangers to accept it."
Post a comment about this story in Reader Discussion…
Track and share business topics across the Web.
RSS Feed: Most Read Stories
RSS Feed: Most E-mailed Stories
RSS Feed: Most Discussed Stories
Buy a link now!
About Advertising EDGE Programs Reprints Terms of Use Disclaimer Privacy Notice Ethics Code Contact Us Site Map
©2010 Bloomberg L.P. All Rights Reserved.
Read Full Article »