Is Google overpaying for Groupon?

December 1, 2010

When a company has a lot of cash and not so many new sources of revenue, it can be tempting to buy its way into new markets. But such a strategy has its risks, which are best illustrated by ill-fated acquisitions like eBay’s $3.1 billion purchase of Skype in 2005. eBay ended up taking a writedown for the deal and sold off two-thirds of the company at a $2.75 billion valuation four years after the purchase.

The eBay-Skype story comes to mind as Google is close to paying as much as $6 billion for Groupon. Like eBay, Google is a company eager to find new revenue in emerging areas of growth. Just as eBay was seeing its online marketplace business mature, Google is needing to find growth outside of its core business of search.

eBay thought Skype could easily be folded into the company, even though it could never explain why online auctions and phone calls over the Internet was a natural fit. Google’s hunger for Groupon seems twofold: Groupon has a strong local component to it, and local is a clear priority for Google. And Groupon will bring Google a steady customer base it hasn’t been able to build on its own for local and social features.

But here too, it’s hard to see a natural fit between Groupon’s deals of the day and Google’s existing services. Google’s revenues come from serving online ads, whether in its search results, inside YouTube videos or alongside Gmail inboxes. Groupon may offer more real estate for Google ads, but clickthrough rates may not be as high as on search results.

Google may be hoping to sell more ads to the retailers using Groupon’s service. But even this seems like a small return for the price Google is paying. And while Groupon is reportedly profitable, it’s not clear whether Groupon’s profit margins will match the 25% that Google routinely produces.

Perhaps Google will succeed where eBay didn’t. The company has a history of making sensible acquisitions. eBay paid $3.1 billion for a company that was making $60 million in revenue. Google is reportedly offering 12 times Groupon’s estimated $500 million in revenue. When Google bought DoubleClick, it paid $3.1 billion, or ten times that company’s revenue at the time. In retrospect, that deal turned out to be a smart one for Google.

DoubleClick, however, had a clear benefit for Google – to strengthen its ad business by moving into display ads. If Groupon’s group-buying model turns out to be a fad, or if other companies eat away at its customer base, we may look back on the Google-Groupon deal and wonder what they were thinking.

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