Thursday, December 02, 2010

Stop, Google, Stop !!!

I remember trading back in the late 1990s; anything with a .com name would command an unbelievable valuation and stock price. Getting in on one of these IPOs was considered the holy grail of investing. Companies with zero sales and negative revenue but a good business plan could command $100′s of millions in investment dollars. Sky high stock prices had no basis in reality and the stock market soon learned a harsh economic lesson when the bubble burst.

Google’s (Nasdaq: GOOG) recent $6 billion offer for local online coupon company Groupon reminds me of the start of the Internet bubble – though there’s one big difference: the stock market is rejecting the deal. Have investors finally learned the hard earned lessons of the bubble bursting scenario? Are stock investors today far more sophisticated than they were at the turn of the 21st century? Well, it sure looks like it. Google plummeted 25 points when its offer for Groupon was made official. This represents about $8 billion in lost market valuation for the search engine giant. Hmmmm, the buy-out offer is for about $6 billion and the acquirer’s market value plummets by around $8 billion when the deal is announced? It looks like investors are sending a clear message to the buy out team at Google and the message is, DON’T DO IT.

Groupon is a thriving, fast growing business that earns about $500 million per year. This is unlike the typical non-revenue producing dream companies of the Internet bubble. However, Google’s $6 billion offer represents more than 10x earnings; an excessively high offer in anyone’s book. Groupon is a great idea that has cracked the local market. Regardless of the concept, what is Google really getting for its money? Future revenue for Groupon could easily exceed $1 billion per year but there are no barriers to entry for competitors. Their idea has been done on a small scale, off line for many years. Why doesn’t Google just launch its own or buy one of the dozen or so competitors in the same space? It would cost a fraction of the price, and with Google’s marketing power, Groupon would likely soon be playing second fiddle. Unless there is some type of proprietary information that investors are not privy to yet, Google could be making its biggest mistake ever.

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