Bambi and I were at the Mayfield Fund holiday party last night and naturally a frequent topic of conversation was the not-Google/Groupon deal. Most folks appeared to be amazed that Groupon would turn down a reportedly $6 billion proposal. And believe me, $6 billion sounds like a lot of money. I would really like to have $6 billion.
But is Groupon worth more than $6 billion? Was it the right call?
I don’t know.
But I can see Groupon’s logic (or at least my version of Groupon’s logic). Here’s something like what I think Groupon is thinking.
First off, it’s important to understand that Groupon was founded some two years ago and has reportedly $2b in sales. That’s not even a hockey stick – that’s just a line going straight up. And it’s not a line going straight up of free video streams (YouTube), free calls (Skype) or free registered users (Facebook). It’s a line going straight up of DOLLARS!!!
You don’t see that very often in our world (almost never). So when you do, you realize you have something rather special, and provided you’re not late on your car payment, you probably want to carefully consider when to sell it.
The question becomes what is Groupon “at scale?” What do they look like when the growth begins to slow down?
If $6 billion was too low, then they have to believe that there’s at least a double digit (and possibly triple digit) billion dollar valuation in their future.
So the question is “which multiple will it get?”
If we line up the comparables, we see at one end folks like Amazon and Yahoo, with price-to-sales in the 2x to 3x range. We don't have much more to go on besides revenue for Groupon. Hence this analysis is just looking at revenue.
If Groupon thought it were going to end up looking like an Amazon or Yahoo, then it should likely have taken the Google offer.
In the next tier we have eBay and Google, coming in around 4x to 6x sales. It’s easy to see the Groupon folks saying across the table “look Google, we’re growing faster than you are and we’re going to add 10% (and rising) to your revenue – and you’re marking us *down* 50% on your multiple?!?” (Google is at 6x sales and it reportedly offered 3x sales). Google could naturally argue that its multiple is the product of a much deeper and more proven market position, and a very carefully developed capital markets position.
Nonetheless, I can see Groupon’s indignation at the proposal, "Hey! We offer products at 50% off – not ourselves!"
And then there’s the top end of the current multiples landscape, OpenTable. Currently trading at 19x sales. Does Groupon think it can gain a position in the market like OpenTable? But does it have the competitive advantage of an OpenTable? Is it able to lock in its customers as effectively? Can Groupon resist competitive pressures in the long run?
So the first question is who does Groupon think it is? By reportedly turning down the reported Google offer, I think we know who Groupon thinks it isn't.
The second question is going to be who public investors think Groupon is? This is going to be the really interesting one to see answered.
As with American Idol, we’ve passed the round where the judges decide. Now we’re entering in round where you – the public – get’s to vote on your favorite mulitples for Groupon.
Disclaimer: Ezra Roizen is a Registered Representative of Ackrell Capital, LLC, a member of FINRA and SIPC. Nothing in this posting should be construed as investment or financial advice
(Image source: Ilene.typepad.com)