December 1, 2010, 12:12 PM

As Google courts Groupon, analysts are divided on whether the marriage is a good idea

Some say the rumored price is ‘absurd,’ while others believe the deal makes sense.

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Rumors continue to fly as to whether Google. Inc. had offered somewhere between $5.3 billion and $6 billion for Groupon.

The deal would enable Google to add the largest player in the rapidly growing U.S. daily deal space. However, analysts were divided as to whether the proposed marriage makes sense.

“I don’t have any issue with Google making an acquisition, but I do have an issue with the price,” says Sucharita Mulpuru, vice president and principal analyst for retail e-business at Forrester Research Inc. “The numbers being talked about is an absurd valuation.”

However, given estimates of the daily deal site’s revenue and growth curve, Lou Kerner, vice president equity research at Wedbush Securities, disagrees.

“The history of the Internet shows that early movers, like Amazon, continue to grow market share and companies want to work with that first mover because of the first mover’s reach,” says Kenner, who covers social media and e-commerce.

He suggests that if Groupon generates revenue of $500 million this year, $1 billion next year and $2 billion the following year, then the acquisition price would be only three times revenue within two years.

“Nobody knows for sure whether Groupon can follow Amazon’s growth path,” he says. “This industry is two years old and nobody knows how to size it appropriately. The most common mistake that analysts like myself make is to look at a chart and assume that the path will continue because sometimes that happens and sometimes it doesn’t.”

Moreover, Kerner believes that Groupon fits well with Google’s other locally focused initiatives, such as Google’s recent enhancement of its Product Search comparison shopping engine that allows consumers to check whether a product is in stock at one of the more than 70 retail brands participating in the program.

Mulpuru says that while Groupon’s local angle would fit Google’s focus, so would any number of Groupon’s competitors.

“Groupon has a million competitors and everyone and their grandmother are in the space,” she says. “Many of those, like LivingSocial or BuyWithMe would provide the same benefits as Groupon.”

Groupon’s growth, she says, comes from its expansion into small markets, such as Greensboro, N.C.

“If you’ve already expanded in second- and third-tier markets, where else are you going to grow?” she asks.

While Groupon has said that it plans to offer multiple deals in many markets, Mulpuru is skeptical whether that will prove successful.

“Let’s be real, how many Groupon deals are good in the first place?” she says. “Any given consumer might say that maybe 10% of them are worthwhile, so before they start sending two deals a day out they need to ensure that they’re getting the one deal right.”

While a Groupon spokeswoman says Groupon will not comment on the proposed deal, she does note that the daily deal site continues to grow.

Groupon today announced the launch of Groupon Hong Kong, Groupon Singapore, Groupon Philippines and Groupon Taiwan via its acquisition of daily deal sites uBuyiBuy, Beeconomic, and Atlaspost, respectively. Terms of the deals were not disclosed.

The acquisitions extend Groupon’s reach across East and Southeast Asia, joining Groupon Japan, which launched in August.

The daily deal company also today announced the expansion of its Silicon Valley presence with the opening of a new Palo Alto office and its acquisition of San Mateo-based Ludic Labs, which provides local marketing services such as Offer Foundry, a self-service advertising and deals platform for local businesses.

Groupon says it plans to expand its Palo Alto staff from 25 employees to more than 100 within the next year.

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