Analysts are sceptical about the $5 billion to $6 billion that Google is reportedly considering paying for Groupon.
Google would be overspending if it paid north of US$5 billion to acquire online coupon provider Groupon, according to various industry analysts.
While Groupon would give Google a boost in local advertising and make it a major player in special online deals, Google could find cheaper alternatives than the $5 billion to $6 billion that it may agree to pay, if anonymous sources for The New York Times and The Wall Street Journal are correct.
"This is a bad, bad idea for Google especially at the absurd valuation numbers being thrown around. There is no reasonable way to justify those figures and I will be shocked if the Google team doesn't see through that. They're smarter than that," said Sucharita Mulpuru, a Forrester Research analyst, via email.
Karsten Weide, an IDC analyst, holds a similar view, saying such a deal would be "a major blunder" for Google. "Several billion just to acquire the latest fad? It is not like it is going to be the next Facebook," Weide said via email.
On Tuesday, The Wall Street Journal's AllThingsD and the Times separately reported that Google is close to buying Groupon for as much as $6 billion, and that the deal could be signed this week, although talks could break down.
Groupon, launched in November 2008, puts a twist on online coupon distribution. It partners with local merchants and offers steep discounts on their products and services to Groupon members. However, a minimum number of people must commit to taking the deal before the coupons become valid. Groupon gets a commission from each deal. It has sold more than 18.1 million coupons.
The company's latest funding round in April netted it $135 million, which reportedly put its valuation at more than $1 billion. Experts have speculated that Groupon will generate about $500 million in revenue this year.
With its growing roster of local merchant partners in the US and abroad, as well as its millions of consumer members, Groupon is without question "a desirable company for Google," said industry analyst Greg Sterling from Sterling Market Intelligence.
Online coupons and deals are a hot segment right now, and Groupon would place Google right in the mix of things, Sterling said. In addition, Google's local advertising business and mobile and desktop product search would benefit from the relationships Groupon has built with local merchants, he said.
However, Sterling, like others, winces at the rumoured price. "Paying $5 billion-plus for Groupon is a big question mark," he said in a phone interview.
For much less money, Google could acquire other players in this market, like LivingSocial, and have plenty to invest to boost the areas in which they lag Groupon, he said.
"It's a smart buy in the abstract. I just question the price tag," he said.
If the deal collapses, Groupon has other suitors, reportedly including Yahoo, and it could also become a public company. "Groupon would have a viable IPO," Sterling said.
Neither Google nor Groupon responded to requests for comment.