Introduction
Net Present Value (NPV) is an important tool used for capital budgeting analysis in most companies. Through NPV, financial managers can decide what decision is most profitable for companies’ shareholders. This report analyzes the feasibility of Google’s intent to purchase Groupon. First, the report presents an analysis of the value Google’s potential acquisition of Groupon would add to the shareholders of the two companies. Groupon’s current value, based on an NPV computation is USD 369,291,700 (See Appendix 1). Although Google offers as high as USD6billion to purchase Groupon, it is important for Groupon’s executives to consider the company’s potential before accepting Google’s offer. Should this deal pull through, however, it will be advantageous for Google’s shareholders since Groupon is currently in the way of Google’s intent to break into the local advertising market.
Influence of Deal on Google Shareholders
Groupon’s actual value is in its email catalog. However, Groupon’s email list is a list of people seeking cheap products. Firms with large lists of individuals who have already shown their inclination to pay full price may offer a less attractive proposition to potential marketers. This, however, does not indicate that Google’s $6 billion offer for Groupon is outrageous. No other company has penetrated the local-internet-advertising industry as effectively as Groupon has, and the dynamics involved are considerably less than Google’s other acquisitions (Weiss, 2010). Also, it is the desire for Google shareholders to have the company invest its funds into viable investment opportunities.
It also appears that some criticism of the offer was rather snobbish. In spite of Groupon’s social media accessories, and its profitability, Groupon still appears strangely conventional. Groupon gathers its users to engage in mass one-off discounting programs by sellers (Efrati, 2010). It may appear irrational to buy an electronic coupon company considering that Google’s mission is to “revolutionize the world” (Efrati, 2010). However, this offer is just Google’s way of reacting to an identified investment opportunity. With simple text advertisements, Google expanded to display through the purchase of DoubleClick and is now shifting to the coupon market.
Obviously, Google’s intended purchase may also be a way of preventing Groupon from ending up with companies such as Yahoo or Facebook. However, Google is in a dilemma with regard to the feasibility of purchasing Groupon. Local advertising funds have historically been gained by players in the local media, and Google will not intend to participate in the production of local media. Google is an absolute advertising company and does not have any editorial content. Google also intends to be internet-based; its shot at marketing print adverts was a big failure (Efrati, 2010). Groupon offers Google access to an entirely new market segment it naturally would find it very difficult to reach. Though acquisition will appear to be overpriced, Google is wealthy enough to invest $6 billion, even in a high-risk opportunity. Rather than leave funds lying idle, it is worth taking the risks and investing in Groupon.
Potential for Groupon Shareholders
The Groupon board members would gain financially if they sell to Google. Groupon partners Keywell and Lefkofsky have jointly turned in almost three billion. So it appears natural for them to accept Google’s offer. It is strange how one may reject an opportunity to gain such high personal wealth. However, while they might have turned down millions of dollars, Groupon partners were accepting potential billions of dollars. Another possible factor these partners may be considering will be the anti-trust issues. It was most likely that a Google-Groupon merger would result in more legal examination than all the previous deals Google had ever done (Weiss, 2010).
At the time of the offer, Google was facing two anti-trust inquiries (MacMillan & Galante, 2010). Google is known for the legal issues it usually faces while purchasing other technology-based companies (MacMillan & Galante, 2010). Anti-trust issues also prevented Google’s intent to acquire Yahoo’s search company (Weiss, 2010). Owing to the possibility that a Google-Groupon may not be permitted to occur, and that it will require a long time to find out this bad news – the members of the board decided they may require a considerable breakup fee should they accept the offer Google was making.
It is also important to consider the influence the sale of the company would have on employee motivation, and effectively, overall company performance. Groupon founder Andrew Mason must consider that selling the company would reduce the motivational level of the employees and send away company clients (Weiss, 2010).
Mason enjoys the autonomous nature of Groupon, and this allows him the time to ensure Groupon’s rapid growth. However, Groupon, whose approach has spawned numerous copycats, does not have the financial patronage and international distribution it would enjoy from ownership by the major player in today’s internet industry, Google (Savitz, 2010).
Understanding the trends in the internet industry also shows that turning down the offer may be a more viable decision for Groupon. Mason, who initially fielded an upfront payment from Yahoo! Inc., may need to follow in the footsteps of Facebook Inc. leader, Mark Zuckerberg in resolving that his company will perform better with venture support rather than as a segment of a larger company. Although Groupon will be the most expensive purchase by Google (Weiss, 2010), it may not be viable to simply sell the company for the money.
Though they may operate in the same industry, different companies have their target markets and Groupon’s target is local commerce (Froelke, 2010). Operating autonomously was advantageous for Facebook, a company that grew to worth over $40 billion in under five years after turning down a $1 billion offer from Yahoo. Established in 2008, Groupon has gotten 35 million users and a workforce of 3,000, delivering coupons to over 300 markets (Froelke, 2010). The major reason behind Groupon’s growth can be related to the founder’s use of exceptional efforts, who explains that if the workers enjoy selling coupons to clients, then users will enjoy purchasing them (Froelke, 2010).
While selling Groupon to Google may be profitable in the short run, it is important to consider the potential gains. Groupon can decide to make a public offer instead of selling the company to Google. The performance of technology companies during the economic downturn seemed to increase investors’ appetite for public offerings in the industry (Hansen, Ibarra, & Peyer, 2010). The IPO market is healthy especially for firms that have evident business systems, and Groupon obviously falls under this category. Amongst the 55 companies in the technological industry that went public this year, forty are trading higher than their IPO price (MacMillan & Galante, 2010).
The potential for business success is majorly influenced by the creativity of the founder. Mason has proved his innovative abilities. This is evident in the financial support he got from Lefkofsky. As he shifted from the music towards startups, Mason shuttled between growing developing Policy Tree, a website for creating political discussion and seeking an MSc. in Public Policy. He dropped out when popular startup investor, Eric Lefkofsky gave him $1, to start a new company referred to as The Point, a predecessor to Groupon that assists aspiring activists raise money and creating petitions by linking up with friends. It was The Point that moved Mason to try a new website built on the concept of collective purchasing (Geoff, 2010). Groupon, quickly added employees, mostly Midwesterners within their twenties. Employee writers, some employed from the native improvisational entertainment scene, roll out humorous metaphors of deals at a fast clip, usually pulling initially used jokes from internet-based wikis (Efrati, 2010).
Google hesitated on any number Groupon’s board demanded. This would make it an easier choice for Groupon’s executives. There is excess risk in this deal which would only result in a three-time multiple payments of $2 billion run-rate, which Groupon started observing not long ago. This will be an obstacle for the deal since the board members are aware of the company’s rapid growth rate.
Groupon’s revenue continuously grows at a non-linear rate, which keeps the company constantly in the media (Efrati, 2010). Groupon registered over 35 million subscribers in one year. Groupon recruited 124 workers in December 2009 and increased its workers to 3,100 within one year. Groupon’s performance so far shows that it is a spectacular company and this would definitely make the board sentimental about selling a company that had performed this excellently.
Groupon is plainly offering a new approach to internet-based interaction and has succeeded in creating possibly the greatest method of advertising ever considered. This is the perfect time for the company to exist. It is a venture that can only occur now because initially, there were no social tools on the internet functioning the way they are presently, and there were few retailers embracing the opportunity how they should. While about 2000 people have imitated Groupon’s approach, the company still controls 70% of the industry and is working at a speed that has not been seen before. Groupon is indeed a special company.
Conclusion
This paper analyzed the feasibility of the merger and acquisition between Google and Groupon. This feasibility was reviewed from the perspective of both Google and Groupon. The results of the analysis indicated that while Google stands to benefit from the M&A between the companies, Groupon’s shareholders would benefit, but only on a short-term basis. Considering this, Groupon’s management may need to suspend the deal and focus on organizing an Initial Public Offer (IPO). Google’s current offer is $6 billion and this may be an attractive offer for Groupon’s board members, considering the personal financial impacts it would have on them. However, their choice of an IPO will not only provide the board members personal financial gains but will further drive the company’s competitive ability against other companies, including Google. This makes it more feasible for Groupon’s executive to focus on driving Groupon to the next level, via an IPO, rather than considering Google’s offer.
Although it will be more feasible for the executive board members of Groupon to consider an IPO, it is yet also necessary to view the decision based on the possible advantages Google would bring to the partnership. Google is amongst the strongest players in the information technology industry. This would increase Groupon’s possible emergence as an international contender in international advertising. The company currently lacks the financial ability to go international and needs the assistance of major players, such as Google. It is, therefore, necessary for the executive board to also consider the possibilities this deal will bring to them, instead of focusing solely on the negative results.
Groupon is not the only company that would be taking a risk if it goes ahead with this deal. Google shareholders would also need to understand the risks associated with entering this deal. Google seeks to invest $6 billion in Groupon, a company that has been successful only locally. Although Google is still cautious enough to spread the payment into three installments of $2 billion, such an approach may influence Groupon’s decision to go ahead with the deal. Google is a formidable player in the industry and is wealthy enough to risk a considerably viable investment of $6 billion. The deal will be a win-win situation for Google if Groupon accepts the offer. Thus, Google needs to be more flexible in its proposed payment terms. For Groupon to accept the offer, Google will need to prove that the deal will have a low antitrust risk level. Groupon needs to be certain of the potential legal issues that may result from the deal since it risks losing more than Google, should the deal go sour. Therefore, both companies have to consider both the negative and positive attributes of the deal, prior to taking any decision.
References
Efrati, A. (2010). “Google in Talks to Buy Deal Site Groupon”. The Wall Street Journal. Web.
Froelke, M. C. (2010), The Real Deal. Chicago Mag. Web.
Geoff, W. (2010). “Groupon’s Andrew Mason: The Unlikely Dealmaker”. AOL. Web.
Hansen, M. T., Ibarra, H., & Peyer, U. (2010). The Best-Performing CEOs in the World.Harvard Business Review. Web.
MacMillan, D. & Galante, J. (2010), Groupon Prankster Mason Not Joking in Spurning Google. Devious Media. Web.
Savitz, E. (2010) “Google Plans ‘Google Offers’ To Take On Groupon”. Forbes Website. Web.
Weiss, B. (2010), Groupon’s $6 Billion Gambler.Wall Street Journal. Web.