Google’s Acquisition Bid for Groupon Takes Us to the New Reality

On rare occasions a clearly spectacular and indicative acquisition bid gets underway.  Google’s offer to Groupon for $6 billion is definitely in that very special number.  A Groupon acquisition has the makings of being as a true game changer that goes far beyond the usual case for growing increased scale or expanding market possibilities.  It is those two, but much more.

Aside from the eye catching amount of money involved, there are important lessons for any company considering an acquisition or that might become a target.  The obvious thing is that Groupon is such a pure capabilities and intangible assets play.  The noteworthy thing here is that highly valuable intangibles can often be found, if in lesser degrees, in the embedded special knowledge and capabilities in any acquisition. That is, if companies looked at the overall possibilities of an acquisition instead of focusing on the “more of the same” model. It is just that in the Groupon case these aspects are in such high relief that it is impossible to miss them.

Because of this, the extraordinary acquisition offer for Groupon, the start up online discount coupon company, is well worth our attention.  This is not only because that this is a larger than life story, but also because we can learn such a tremendous amount from it.

What are Groupon’s special characteristics?

For one, the Groupon did not exist five years ago.  This is a company that started out in a rented church space and has grown to revenues of $500 million.  Another measure of how dynamic it is, is that it has gone from 200 to 3100 staff in the last eleven months.  Secondly, it is a pure intangible asset/capabilities play – there are no physical resources in the company to speak of. Thirdly, there are no barriers to entry for competition.   But ultimately the answer to the question is that Groupon is potentially a game changer of the greatest magnitude.

First, why acquire such an expensive property such as Groupon?

• On the positive side, by acquiring Groupon the acquirer gains 1) know-how, 2) an artfully developed networked links to a world of “social” consumers across the US and perhaps most importantly, 3) the services and special perceptions of the people who can make this happen.  While people often comment that anyone could create a company like Groupon, and it has its clones, no one has achieved what Groupon itself has done.   The leadership at Groupon have has achieved prominent success in just their first stage of what is emerging to be a multi-stage development journey.  Like its Facebook colleagues, going into the future, Groupon looks to be savvy enough to get increasingly more pervasive and forge even richer links to “social” customers and, no less importantly, to their extended networks.
• From a defensive perspective, if a company like Google does not make this kind of acquisition, one of its competitors may well do so.  That may well put Google at a distinct competitive disadvantage.    Danny Sullivan, editor of Search Engine Land, an industry blog, raises the question, “What’s the price of not buying it?”

One key reason for Google seeking out for Groupon at such a premium is Groupon’s success in its connections to local providers and services and their customers.  While Google has put extensive resources into its listings of businesses alongside its mapping service, it has had only limited gains with the program after years of trying.  Sullivan continues, “Google fears the damage rivals could inflict if they acquired Groupon instead. Facebook, which has become a larger threat in recent years, could use Groupon to enhance its formidable position in social networking. Meanwhile, Microsoft could use Groupon to erode Google’s dominance in search.”

Ben Parr, co-editor of Mashable, echoes this sentiment in these statements:

A fascinating dimension here is not only the unique rise and attractiveness of Groupon, which is certainly a phenomenon all by itself.  It, with Facebook, is one of the stellar performers in the emerging social media world.  Despite questions as to how long it will hold its remarkable position (some say it peaked during this last summer), what it compelling is that it stands for a new, huge market and an innovate way to engage in that market.

This fascination has spawned something probably has never happened in the world of M&A’s:  An online Reader Contest to predict the terms of Groupon’s acquisition, with these questions:

• Who will acquire Groupon?
• How much will Groupon sell for?
• On what date will the sale of Groupon be announced?

(If you want to enter the contest go to: http://www.businessinsider.com/reader-contest-predict-the-terms-of-groupons-acquisition-2010-11#ixzz16soDlKci)

Who are the likely competing candidates besides Google?

eBay, Facebook, Amazon, and Microsoft have reportedly put themselves in the running for Groupon.  Yahoo has already made its move and dropped out as the price escalated.  Each candidate has a different configuration, with its own set of gains and costs that could come out of such an acquisition.  The strategic gains for eBay, for example are, according to Nicholas Carlson in Business Insider, that

• eBay’sgrowth is starting to slow.
• Its core business is essentially advertising for small, local businesses and Groupon presents a real threat.
• Instead of spending thousands of dollars on Google ads to drive potential customers to eBay auctions, local ad buyers could, through Groupon, just plow that money into discounts for new customers.

For eBay, Microsoft, and the others these issues are very consequential.

Most importantly, what does this acquisition possibility reveal?

The most important point is that every company, whether acquirer or the target should assess its own the intangible values and capabilities as well as that of its acquisition target to see the how that company could be an engine for value creation in as many ways as possible.

The fact is that Groupon is selling nothing but intangible assets and its core capabilities.  It has a strategic concept – a great idea – that is supported by an effective business platform and equally effective execution that has come to work together enormously well.  Based on all of that it goes into its future with an enormous field of possibility and the chance of becoming an ever more dominating reality.

The question is whether we can see this or if we are so captive of the dominant M&A EBITA (i.e., earnings before interest, taxes and amortization) and deal model that we cannot easily consider this reality to capitalize and move on it.

Google and its competitors for Groupon have thought beyond that or they would not put themselves in such hot pursuit of this important prize.  This is not to endorse the wishful thinking that ran through the Dot Com bubble of 1995-2000, but recognition that intangibles and emerging phenomena such as social media are changing the equations of the market place, something the candidates to acquire Groupon are grappling with.

Some intriguing questions to consider: Try this exercise

The Groupon play gives us a chance to see how the outlook and capabilities of a suitor can make a huge difference in terms of the value that can be created through an acquisition.

Here is the exercise:

1)  Think about the various candidates: Google, Microsoft, eBay or Amazon.  How would their various configurations of capabilities and strategies match up and be able to take advantage of such a major acquisition?

2)  If you were a leading decision maker at one of these organizations, how open would you be to rethink what your company is are about and reshape yourselves into an unprecedented new organization as a result of acquiring and integrating Groupon.  Would you consider rethinking how you relate to their business strategy, customer strategy, organizational strategy and knowledge strategy?

Each of these companies has to have the desire to be open to Groupon’s leadership and the staff, as well as its network to bring them into the new company as seamlessly, intelligently and as enthusiastically as is possible.  Anything less will corrode the value of the acquisition and lead to a diminishing of value, where there is the chance, and in fact the need to make this acquisition a springboard for a quantum leap in performance and value creation.

At the same time, each of these companies has to come to understand what its capabilities are and what ones need to be developed.  The acquisition could be a catalyst for that as well as one for achieving remarkable strategic ends.

3)  Think about any similar moves your company has made or is considering.  Think about your strategic position and how your actions and investigations lead to setting the stage for your own quantum leap.  Or, what you need to cultivate for that very thing to happen.

We will be following the Groupon bid with enormous interest, in terms of how it plays out as far as a deal (or not), but then how the winning acquirer works the acquisition.  We hope that this Newsletter puts you in a position to do the same.  Should be fascinating!