Thursday, January 13, 2011

Groupon's International Acquisition Strategy and Its Long Term Future

When it comes to acquisitions, Groupon has been most widely questioned for its rejection of Google's $6Bn offer (Facebook, which is five years older, has 2-3x the revenue, and is, well, Facebook, is probably the only VC-backed company to reject a larger offer, in absolute terms, since the dot-com bubble).

Tuesday they announced a trifecta of acquisitions enabling their entrance into India, South Africa, and Israel.  Clearly they wasted no time putting their $950M round to use (of which the firm probably only pocketed ~ $525M - but what's $425M among friends?).  What surprised me most though as someone who apparently was not following the fastest growing company in history closely enough, is that this was not even close to Groupon's first international acquisition and that in fact they've been on an international acquisition tear since last May, just after the last round of gargantuan fundraising.  In fact I'm not sure if Groupon has entered any international markets organically.

To me this raises some questions:

  1. Is the speed with which Groupon is making these acquisitions driven by a desire to keep revenue growth going at the same, insane rate?  Financial history has almost nothing good to say about the fates of companies (and their investors) that carry out aggressive acquisitions simply to raise their top line to meet investor or public expectations.  Even the Forbes article declaring Groupon the fastest growing company in history excludes companies "built mainly through mergers or acquisitions."  The only way this can be creating long term value is if Groupon is able to grow their acquisitions in a similar fashion to the way they have grown themselves, which brings me to me second question:
  2. Will Groupon be able to integrate these acquisitions successfully?  A far as I can tell, the real reason behind Groupon's success is not their first-mover advantage per se, but rather their culture.  Something about their humorous, tongue-in-cheek write-ups transformed coupons from something your cheap parents did on Sunday afternoons to an activity for those "in the know."  Obviously this was helped by the recession, but also by their savvy hiring of humor writers to write their copy and the culture of humor that goes all the way up their CEO.  This sense of good humor has lately gone from become crucial to obtaining new customers to obtaining new merchants given some of the highly public Groupon horror stories told by unhappy Groupon merchants.  Financial analysts and MBA-types like to downplay corporate culture, but in Groupon's case it seems impossible to ignore - even their press release on their $950M round is titled Groupon Raises, Like, A Billion Dollars.  Will they be able to assimilate their acquisitions into this culture, and if they can't, will they work?  

I realize that acquisition is generally the fastest means of growth, and is a widely accepted strategy for entering international markets.  But this is Groupon - do they really need acquisitions to grow faster?  I can't help but wonder if Groupon would not do better in the long term if they expanded internationally either by hiring local talent that they had carefully vetted for cultural fit (perhaps even by bringing them into their Chicago office for cultural immersion), or by sending some of their non-American employees to their home countries to open local Groupon offices (they must have some foreigners among their 4,000 employees centered in a major city like Chicago) .  How much of a speed advantage can you get from buying a local clone who may have only been operating for three months (in the case of India), nine months (in the case of Israel), or 7-8 months (in the case of South Africa)?

Only time will tell - and even then it's interesting to consider whether the public will ever know -  but it will be interesting to see if Groupon's international appendages, grafted on through M&A, turn out to be a success or a PE roll-up idea gone sour.

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