December 5, 2010 8:39 pm

Google deal collapse stirs controversy

Google was caught up in controversy over the weekend about its failure to seal a high-priced acquisition of Groupon, an online marketing service for local merchants, with analysts split over whether it had come close to over-paying, or whether it had suffered a strategic setback by not securing the deal.

Google was last week in talks to buy Groupon for up to $5bn, according to a person familiar with the talks, in a deal that would have been its biggest to date. But those talks fell through at the end of last week, according to reports.

Its apparent willingness to pay such a high price for a two-year-old company points to a wider boom in the prices of young internet companies, according to analysts and investors.

“Valuations certainly are rising for social start-ups,” said Augie Ray, an analyst at Forrester Research. “The valuations are based on a great deal of speculation – these are not mature companies with long histories of stable revenue and profit.” He added, though, many of the new social companies had at least demonstrated they have profitable business models, unlike many companies that won backers in the dotcom bubble.

Fred Wilson, a New York venture capitalist who was an early backer of start-ups like Twitter and Foursquare, wrote over the weekend that investment in some areas had reached a level of “hyperactivity”, with investors “throwing money at energetic entrepreneurs with plans, hopes, and dreams and at emerging winners” like Groupon.

In spite of a widespread view that Google was in danger of overpaying for Groupon, it was impossible from published information to assess the true value of the company, said Youssef Squali, an analyst at Jefferies. Like others, he pointed to reports that Groupon’s revenues this year would be anything from $500m to $2bn as evidence of how hard it was to arrive at a reasonable price.

Many Wall Street analysts appeared unconcerned last week about the potentially high price of a deal, preferring instead to focus on the strategic significance of an acquisition that could give Google a jump-start in the fast-growing local advertising market online.

“Multiples notwithstanding, Google still has a big hole in local,” Mr Squali added. While an earlier attempted acquisition of local service Yelp might have given it a bigger foothold in this market, the purchase of Groupon, which has a proven business, would have been a far better option, he added.

Other analysts, however, disputed the strategic value of a deal. Whatever Google’s plans in local, “they don’t need Groupon to do it,” said Sucharita Mulpuru, an analyst at Forrester. “There is nothing that Groupon has that Google couldn’t build themselves, or partner with one of the other half-dozen viable contenders in the space to get for a far cheaper price than Groupon’s.”

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