The history of Groupon [GRPN] is an interesting tale that involved dramatic finishes, betrayal, roller coaster rides, and valuable lessons. It is not a well known history because of its irrelevance in the world beyond its niche of "online coupon clippers." But I believe the history is still worth sharing.
Prior to Groupon’s IPO in November 2011, Google made an offer to buy them for up to $6 billion in the fall of 2010. It was almost a done deal, but Groupon made the ultimate decision to reject the bid last minute. It was quite shocking and Google management was disappointed at the time. To put the bid into perspective, the $6 billion bid was equal to about 75 per cent of Google’s net income for the year ending 2010. Google was confident that Groupon was worth a lot, but Groupon was more confident that they were worth much more. Groupon was a fast-growing business and there were very few competitors like it at the time, so they practically had a monopoly. But with such small barriers to entry, replica businesses starting popping up with better pricing for retail outlets. And the decision to reject the bid was a surprise to many.
The IPO was a success. Early investors got a huge pay day and all of the concerns about their business model took a back seat. The company offered about 5 per cent of its float to the public at $20 a share and raised $700 million to expand. This valued the business at roughly $13 billion, more than twice the final bid by Google. There was still huge demand post-IPO. The shares would debut on the NASDAQ and traded as high as $26 on the opening day, creating a market cap of $17 billion. It seemed that Google definitely missed the boat and should have bid much higher. But that is where Google’s regrets end and Groupon shareholder pain’s begin. Both companies have gone in opposite directions since that day.
Today, Groupon shares are valued at around $5.50 with an estimated market cap of $3.6 billion, just 60 per cent of the final Google bid, and a steep discount to its IPO valuation. That $26 price it reached on the opening day has never been touched again. Right after its earnings report in late 2012, the shares touched $2.60 making the company worth under $2 billion. The stock has recently traded up from its all-time low on rumours that Google will make another round of bids for the company, but trading on rumour is a gamble. Groupon has yet to earn an annual profit, losing $67 million in 2012 and $373 million in 2011. Turmoil and poor performance has led to the firing of their CEO. Even with double-digit revenue growth, its long-term growth prospects seem bleak and fewer and fewer customers are using their services. There are just too many similar online coupon brands out there now.
Meanwhile, Google reached an all-time high this month of $844. The company is now worth about $267 billion, an increase of 33 per cent since Groupon’s IPO debut. The company reported net income over $10 billion in 2012 and has seen extensive growth in its Android business. It has announced more revenue generating strategies, such as the termination of free apps and is sitting on over $8 billion in cash and equivalences. And investors believe that there is room to grow, with the shares expected to hit $1,000 by year-end. It seems lofty, but this blue chip market giant continues to grow at double-digit rates as well, justifying a 25 P/E.
After being denied, Google decided to make its own competing online business called "Daily Deals." The competition did not kill Groupon, but exposed that their business model was flawed. It also may have exposed that Google got extremely lucky that their poor decision to bid Groupon did not come to fruition, but I digress.
In hindsight, Groupon's decision to reject the bid was a poor one it appears. George Santayana said "Those who cannot remember the past are condemned to repeat it." Groupon should have known it was an overvalued brand at $6 billion in 2010. Even if it made all the right steps to be worth $10 bilion today, they should have sold. The market was in the midst of a second technology bubble and the founders lived through 2001. They saw what happened to Yahoo! and Microsoft. Were they that arrogant to believe a company making $50 million in revenue at the time could create $6 billion in present day profits over its entire existence? They certainly thought so and now the CEO has been canned because of it.
Subscribe to:
Posts (Atom)