Nov. 30 (Bloomberg) -- Google Inc., owner of the world’s most popular search engine, is close to an agreement to acquire daily coupon company Groupon Inc. for about $6 billion, according to two people with knowledge of the negotiations.
The deal may be clinched as early as this week, said the people, who declined to be identified because the talks haven’t been made public. The purchase price would include payments to Groupon executives if the acquisition meets certain performance targets, one of the people said.
Google would use the purchase to benefit from surging demand for coupons, sent via the Web, that offer discounts on everything from dinner cruises to dental exams. Groupon’s strategy is easy to copy, fueling concern that Google wouldn’t be able to wring a high enough return on its most expensive acquisition, said Colin Gillis, an analyst at BGC Partners.
“If you overpay for anything, it will be a controversial buy,” said Gillis, who rates Google shares “hold” and does not own them. “Groupon’s business is subject to mimicry.”
At the price being discussed, Google would be paying almost twice the $3.2 billion it paid for online advertising provider DoubleClick Inc. Technology blog AllThingsDigital reported yesterday that Google has offered $5.3 billion, plus $700 million in so-called earnouts, payments that reward Groupon executives for meeting certain goals.
A final agreement hasn’t been reached and talks could still break down, one of the people said. Aaron Zamost, a spokesman for Google, declined to comment. Julie Mossler, a spokeswoman for Groupon, didn’t immediately respond to requests for comment.
‘Worth The Money’
Google, which boasts $33.4 billion in cash and marketable securities, initially offered between $3.5 billion and $4 billion to buy Groupon, one of the people familiar with the negotiations said. The startup, which was also contemplating raising new venture funding, held out, eliciting a sweetened offer from Google, the person said.
“It’s obviously a big purchase price for a company that’s only two years old,” said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Florida. “Given the competitive position it gives Google in local and daily deals, it’s worth the money.”
Google, based in Mountain View, California, fell $26.40, or 4.5 percent, to $555.71 at 4 p.m. New York time in Nasdaq Stock Market trading. It has dropped 10 percent this year.
Google Chief Executive Officer Eric Schmidt aims to move the company into new areas, such as display ads and mobile marketing messages, to spur growth and keep from losing business as Facebook Inc., the largest social-networking service, adds features and lures Web surfers.
Schmidt is doing that partly through acquisitions, including the $700 million purchase of travel data aggregator ITA Software Inc., announced this year. Google has spent $1.6 billion on more than 20 companies in the first nine months of the year, according to regulatory filings.
Google has been reluctant to use its cash pile, one of the largest among technology providers, to issue a dividend or buy back shares. That has prompted analysts and investors to urge the company to make larger acquisitions.
Chicago-based Groupon, founded two years ago, sends daily messages to users in 300 markets, offering discounts on products and services. Groupon keeps a 50 percent cut of every deal sold, while businesses benefit from a rise in new customers. Deals, known as groupons, activate when a certain number is sold, encouraging users to recommend offers to friends.
Regulators would probably scrutinize any planned acquisition of Groupon by Google to ensure it doesn’t hamper competition, said Allen Michel, a management professor at Boston University. Still, the government would probably not block the deal because Groupon’s approach is so easy to copy, he said.
“Groupon is in a market that doesn’t have large barriers to entry,” said Michel, who frequently lectures on mergers and acquisitions. “It has already spawned numerous competitors and will continue to do so, so it’s not a matter that the consumer is going to be permanently harmed.”
Since May, Groupon has doubled the number of markets it serves. Sales may top $500 million this year, two people familiar with the matter have said. Groupon would reach that milestone faster than Google and Amazon.com Inc. did.
Groupon had a valuation of about $1.3 billion in April, after Digital Sky Technologies led a group that invested in the company. It has raised $170 million from investors, including Facebook backer Accel Partners and New Enterprise Associates.
Groupon has been hiring about 150 people a month, mostly in sales, to enlist the local businesses that provide its more than 400 daily deals, President Rob Solomon said in an interview this month.
Local advertising through media including newspapers, direct mail, radio and the Internet will reach $133 billion in the U.S. this year, according to BIA/Kelsey, a consulting firm.
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