Google’s Bid for Groupon Drives Interest in Daily-Deal Sites

Google Inc.’s bid for daily-deal site Groupon may spur similar acquisitions by the top Internet companies, including Yahoo! Inc., AOL Inc. and Microsoft Corp.

Groupon rivals LivingSocial.com, BuyWithMe.com and Tippr.com are among potential targets as the Web giants seek a bigger piece of the local advertising market, analysts said.

Google offered to buy Groupon for $6 billion, more than 10 times the company’s $500 million in sales this year, two people familiar with the matter said Nov. 30. That valuation is drawing more attention to rivals, said Ira Cohen, a managing director at Signal Hill Capital.

“Leaders get taken out and then the me-too acquisitions happen,” said New York-based Cohen, who heads his firm’s technology practice and has advised companies on more than 200 mergers and acquisitions. Groupon’s competitors aren’t likely to get such lofty premiums, he said.

Groupon also considered raising money from venture capitalists, who valued the Chicago-based company at more than $3 billion, the people said. That led Google to raise its initial bid, the people said.

Yahoo had approached Groupon and didn’t make a deal to buy it, according to two people close to those discussions. Yahoo may now be looking for a different daily-deal site, said Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco.

Even if Google’s Groupon negotiations founder, other companies will probably show interest in coupon sites. Amazon.com Inc. and EBay Inc. are among companies likely to consider daily-deal targets, Aggarwal said.

Amazon, LivingSocial

“If Google makes a move, many of the other Internet companies will try to get similar assets -- be they homegrown or through acquisitions,” Aggarwal said.

More local ad spending -- estimated at $133 billion this year -- is moving online and away from print, radio and direct mail, according to consulting firm BIA/Kelsey in Chantilly, Virginia.

Amazon is considering an investment in LivingSocial, Groupon’s biggest competitor, tech blog Venture Beat reported.

“We see a tie-up between Amazon and LivingSocial as a smart strategic and financial move,” Marianne Wolk, an analyst at Susquehanna Financial Group in New York, said today in a note to clients. “It could also help Google gain regulatory approval for a deal with Groupon.”

LivingSocial has about 500 employees, up from 30 at the end of last year. The company generates about $1 million a day, and expects 2011 sales to top $500 million, said Chief Executive Officer Tim O’Shaughnessy, who founded the site in 2007.

‘Big Players’

“It’s an easy business to get into, but it’s not necessarily the easiest to scale,” O’Shaughnessy said.

He declined to comment on possible interest from Amazon, saying only, “Big players entering the space provide even more validation to what we know is a successful and growing business strategy.”

Daily-deal sites offer discounts -- typically 50 percent -- from businesses such as restaurants and nail salons, then keep a portion of the sales. The promotions activate once enough people sign up for them. The barriers to start such a site are few -- just about anyone with an e-mail list and a deal can do it.

OpenTable Inc., the online restaurant-reservation system offers a daily deal. So do e-commerce site Gilt Groupe Inc. and Facebook Inc.

“This is a really big category and it’s not winner-take- all,” said Dana Stalder, a general partner at venture capital firm Matrix Partners in Menlo Park, California. Matrix is an investor in BuyWithMe Inc. “I would not be surprised if there’s further consolidation in the category in the next 12 months.”

Competitive Edge

Internet companies often find themselves pursuing the same startups to gain a competitive edge. Apple Inc. approached mobile ad network AdMob Inc. before Google bought it in May, according to people familiar with the matter. Apple, in turn, purchased rival ad network Quattro Wireless Inc.

Google agreed to buy DoubleClick Inc. in 2007 to gain technology that sells display ads and measures their reach. A month later, Microsoft made a deal to acquire DoubleClick rival AQuantive Inc.

Merchants are figuring out how best to use Groupon, with some getting overwhelmed with a flood of new business. Daily- deal sites will suffer if businesses stop participating in deals because they can’t find a way to satisfy all customers, said Sucharita Mulpuru, an analyst at Forrester Research Inc.

“Everyone thinks this hyper growth is going to continue,” said Mulpuru, who is based in Cambridge, Massachusetts. “If these merchants come to realize these customers are not coming back, they’re not going to do more Groupons. And if they don’t do more Groupons the whole model falls apart.”

Many sites are trying to fill specific niches and tailor their deals. There are also aggregators such as Yipit.com, which compile offers from about 130 sites, including Groupon and LivingSocial.

“Groupon may be the foundation for a whole new set of acquisitions,” said Peter Krasilovsky, an analyst at BIA/Kelsey in San Diego. “There are dozens of deal-a-day companies that have been out there trying to sell themselves.”

To contact the reporters on this story: Joseph Galante in San Francisco at jgalante3@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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