Groupon now worth less than the $6 billion Google offered.
money.cnn.com
money.cnn.com
Looking at the shenanigans around raising a billion dollars and then giving most of that money directly to a few of the insiders, certainly suggested to me and others that Groupon turned down the $6B bid by Google not because they didn't think the company was worth it, but rather that the rules in place regarding selling the company would not have compensated those same insiders the way they wanted to be compensated. Between the payoff and the fact that most of those preferential clauses, and common vs preferred shares, vanish once the company IPOs, a simple explanation of the sequence of events was that they were a way to structure the payout.
That said, Google would have brought a tremendous chunk of value to the Groupon party. They have lots of infrastructure at scale to handle distribution, a huge inventory of businesses who advertise with them, and a world wide sales team. Given that a lot of Groupon's early issues stemmed in part from the way they compensated their sales team, it seems that Google would have had the option of basically firing everyone to reset all those relationships, and then launching with a completely different cost structure.
But we cannot know and speculation, well its fun and all but what do we learn from it?
Things are only worth what the next person is willing to pay for them, not what the last person actually paid. People buying the Groupon IPO were mostly going with the "greater fool" theory of investing. A money losing company with lots of accounting issues is not something that generally just goes up and up in value.
This reminds me of the Keynes quote: "The long run is a misleading guide to current affairs. In the long run we are all dead."
More on topic, the long run as an abstraction is limited in its utility for investors. This mostly because investors (like gamblers at a roulette wheel) have to place their bets while the wheel is spinning. Without taking a position on GRPN, I'd say that the "long run" verdict is hardly in at this point.
The idea of "worth" or "value" precedes economics as a discipline. Vulgarized economics might offer really weird and ideological versions of them, but it can't demand that everyone stop using them as normal people do.
Anyone can think of instances where someone at their company performs better than someone else but is not well-compensated, relatively-speaking. But no one seriously thinks that someone is inherently more valuable just because they're paid more.
If you think about it, anytime you buy a stock or engage in a market transaction you're rejecting the idea that the price of something is its value. If you exchange money for a good, what you're saying is that that good has more value to you than the price you're paying. The person you're bargaining with thinks the converse. Or if you're purchasing an equity, what you're effectively saying is that you have some non-public knowledge that that equity has more value than what the market price suggests (if you buy equities on a different basis, you should probably stop and move to index funds).
In Groupon's case, its econo-speak "value" came about because everyone assumed that they could gamble and win on the theory that there's someone who's making the same assumption that they could gamble and win on the same theory as them but who is slightly less savvy. Just because a bunch of people are collectively changing their minds about how many idiots are out there who are slightly less savvy than them doesn't change the actual value Groupon ever had.
If you consider your first example at a market level, people that are better compensated are more valuable—because they create more value (the discussion is—of course—not around one's value as a human being). The only reason for imperfection in this regard is market friction—which there is a lot of, in every market. But the market value tends very quickly towards the real value if the market is liquid enough.
In a liquid equity market (stock exchanges for example), the price of the stock you buy is its current value. However, you are making a bet on the future value gains of the company. Buying stock for its current value is investing; anything else is speculation.
As the old saying goes, a little knowledge (e.g., an introductory course) can be a dangerous thing.
You can put a price on something, but until someone has paid it, it seems difficult to argue that the thing is "worth" your price... to anyone. But people routinely argue this, and others believe them.
To take another example: Facebook obviously, at the time of IPO, was not worth what it sellers hoped it would be. At some point in the future it will be worth much more than it is today, and at some other point it will be worth nothing. Today, the agreed worth/value of one FB share is $27.
If something was only worth the cost of the materials that went into it--then what determines that cost? Even steel and oil have value that depends on customer demand rather than any sort of inherent value. And if that was all it was worth, why would you waste time and effort turning steel into a steel bracelet, or a steel ship, when the end product wasn't actually worth more than the materials that went into it? You'd waste energy and human effort without producing any value. You'd be richer just holding onto the raw steel itself.
I purchased four service-based "deals" through deals the site. It eventuated that the business advertising the deals did not exist, had never existed, and was consequently unable to provide the services offered.
I was disappointed and contacted the site asking for a refund. They brusquely rebuffed my request for a refund and instead offered a "site credit" for future deals. I politely indicated that I didn't want a site credit and would prefer my money back. They insisted that their policy was to give only credits.
Fortunately I work in commercial law and could direct them to the relevant provisions of Australian consumer protection law which they were breaching. They quickly refunded my money.
Lessons:
1. These deals businesses are very reliant on doing extensive due diligence on their clients, and can easily be ripped off by an unscrupulous merchant. In my case they ate a loss of 150% on the value of deals purchased (full refund to me, 50% share to the merchant).
2. In order to minimise their losses this site was willing to break the law and outright deceive its customers about their rights. If I were more pugnacious I could have caused them some trouble. Unfortunately most of the customers they try to rip off probably aren't commercial lawyers and they get away with it.
My lasting impression: very difficult industry to turn a profit in, strong incentive to scummy business practices and the attendant legal risk those practices bring. I wouldn't invest.
1. The coupons usually can be redeemed for up to 6 months in these sites and the money is paid to the company only when the coupon is redeemed, so let's assume a 3 month average float time. With clever investing you could do much in 3 months. 2. As with gift cards, I assume, quite a significant percentage of those coupons are never actually redeemed.
I am still bullish that Groupon can become a sustainable business. They are a brand that the local commerce market recognizes, and with that they can package plenty of other services such a POS systems to diversify their income away from just deals.
http://www.businessinsider.com/wait-wasnt-everyone-just-sayi...
I don't understand much about investment markets, but shouldn't that raise investor confidence or is there something else going on?
In GRPN's case, you can see on http://finance.yahoo.com/q/mh?s=GRPN that 45% of their shares are held by insiders. Their sales are probably causing a temporary supply/demand imbalance.
EDIT: sorry, that was Friday (http://dealbook.nytimes.com/2012/06/01/as-lock-up-expires-gr...) but the effect of lockup expiration lasts longer than one day.
Like let's say Amazon with their current trends sees $600 million profit next quarter. Instead of taking that $1 billion profit they plow it into advertising and loss leading promotions until the projected profit is down to $100-150 million. This gives them bigger revenue growth, more users, etc. while still turning a modest profit which let's the execs hit their bonuses.
And just like Amazon the short term profits above all else mentality of investors doesn't get excited about this.
http://betabeat.com/2011/06/groupons-business-is-decaying-in...
Is it true? I don't know (hence my use of the word "may"), but it's certainly a concern for Groupon and other local business services that have to spend a lot of sales people to target relatively small business customers.
There's lots of analysis out there that use the numbers directly from the S-1 to highlight this fact. The crux of the problem is that Groupon needs to find a SUSTAINABLE way to deliver value to businesses and individuals and this doesn't seem to be the case right now.
Retailers should be allowed to cut their product by a less severe percentage, and Groupon's cut should be a fraction of what they take today. Maybe 10-15%.
Groupon is advertising and needs to be evaluated as advertising not as a price cut.
"for the businesses for what's really an email campaign ... something a business could technically do for free or cheap"
No that's not a real option that is either free or cheap anymore then you can replace traditional advertising by having the owner's family pass out fliers and/or stand around with a sandwich board.
I'm speculating here: I doubt that the Google corporate dev team, after looking at Groupon's books (post NDA), would of kept the $6bn price tag, and if they did it would have been subject to considerable reps & warranties.
B = the sum over all shares of the price that each share's owner is willing to sell it for right now.
B > A, by definition. This is why buyouts typically happen at a premium above the share price, because a flat out purchase of shares on the open market would send the price through the roof. So the buyout price is set at a level where enough people feel like they're getting a good deal to let the deal can go through without stirring up too much shit.
tl;dr market cap doesn't mean very much, and shouldn't be compared to a buyout offer, at least without some adjustment.