UPDATE 3-Google close to clinching Groupon deal -- reports

Tue Nov 30, 2010 7:02pm EST

* Deal would be Google's biggest to date

* Shows willingness to employ growing cash reserves

* Google shares slide (Rewrites lead; adds analyst comments, background)

By Alexei Oreskovic

SAN FRANCISCO, Nov 30 (Reuters) - Google Inc (GOOG.O) is reportedly closing in on a deal to buy online discount-coupon sensation Groupon for up to $6 billion in its largest-ever acquisition, signaling a willingness to use some of its huge cash hoard to buy growth.

A deal, reported by several media, including the New York Times on Tuesday, would give Google an important window into a fast-growing $91 billion local advertising market.

But Google's shares fell 4.5 percent, partly on concern it may shell out too much for a business likely to face increasing competition. Reports of the deal came as the European Union announced plans to investigate Google's search practices.

"Investors think that might be overpaying," Kaufman Brothers analyst Mayuresh Masurekar said of the reported $5 billion-plus deal.

"There are no barriers to entry," he said of Groupon. "There is nothing unique to what they're doing, so there is a risk that Google overpays for Groupon at this point."

But he added that buying Groupon could help Google make further inroads into a local advertising market that analytics firm Borrell Associates estimates will be worth $91.1 billion in 2010.

Groupon sends its members daily e-mails with about 200 discounts for goods and services. The deals are activated only when a minimum number of people agree to make a purchase, giving Groupon clout to negotiate steep group discounts on products and services.

Wedbush Securities analyst Lou Kerner said the daily deals service dovetails with Google's search advertising business, with both focused on helping merchants acquire customers.

"Google is building a mosaic of marketing solutions for businesses," said Kerner. "So having this kind of flash sale side of the business, which will all be automated, just makes a ton of sense."

A Google spokesman said the company does not comment on rumor or speculation. A spokeswoman for Groupon declined comment.

A WEB PHENOM

Groupon -- called the fastest-growing Internet start-up in history -- does not disclose financial figures, although analysts estimates for the two-year old company's annual revenue run rate range from $400 million to $600 million.

The company founded by music graduate Andrew Mason, who lives in Chicago with his girlfriend and 20 cats, has been on a tear. Its subscriber base is expected to grow to 25 million in 2011 from 13 million this year.

Its backers include Digital Sky Technologies, which is also invested in Facebook.

"It's been one of the fastest growing companies in history and that growth is going to be accelerated being part of the Google platform," Kerner said.

The New York Times reported the companies were negotiating a price between $5 billion and $6 billion. All Things Digital said they were talking about a price "well above" the $2 billion to $3 billion Yahoo Inc (YHOO.O) offered in failed acquisition talks earlier this year.

The New York Times said the deal could happen as early as this week, but both reports said the talks between Google and Groupon might still fall apart.

The deal would easily rank as the largest in Google's 12-year history. Its two biggest to date are the $3.1 billion purchase of online advertising firm DoubleClick in 2008 and the $1.65 billion acquisition of video site YouTube in 2006.

There is constant speculation about Google's acquisition interests as it has a cash war chest of about $33 billion and does not pay a dividend or regularly repurchase its shares. [ID:nN29216620]

"This is perhaps a good time for them to make bigger acquisitions than we have seen in the past," said Caris & Company analyst Sandeep Aagarwal.

The reports of the Google-Groupon talks come as Google's dominant position in the Internet search market and its expansion plans have led to increased regulatory scrutiny, with the European Union announcing a formal investigation into the company's search practices on Tuesday. [ID:nLDE6AT13Q]

"It's an area that Google is not in now. If you define it as a separate market, it's not going to be an issue," said Richard Brosnick, an antitrust expert with the law firm Butzel Long. "The idea of buying your way into a market is not a basis to reject a transaction."

(For a Breakingviews column on the probe and the reported Groupon talks, see [ID:nN30274527])

Google's planned $700 million purchase of online travel software company ITA Software, currently being reviewed by U.S. regulators, is opposed by several prominent travel industry companies, including Expedia Inc (EXPE.O) and Sabre Holdings Inc's Travelocity.

Google shares finished Tuesday's regular session down 4.5 percent, or $26.40, at $555.71. (Reporting by Alexei Oreskovic and Jim Finkle; additional reporting by Alexandria Sage in San Francisco and Sakthi Prasad in Bangalore; editing by Derek Caney, John Wallace and Andre Grenon)

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