Three reasons Google wants Groupon

November 30, 2010: 3:52 PM ET

Is $5.3 billion an astronomical amount to get the popular deal-a-day web site? Not really. Here's why.

If Google's $5.3 billion offer goes through later this week as suggested, it could be Groupon's lucky day.

Not that luck has been really necessary for the Chicago-based, deal-a-day e-commerce site, which delivers daily discounts and deals from local businesses to 30 million users across 500 markets in 30 countries. Since CEO Andrew Mason launched it in November 2008, Groupon has quickly become the leader in local deals, having capitalized on trends like mobile, flash sales, and social shopping.

But is it worth the cash? Google (GOOG) certainly thinks so, and so do analysts. Three big reasons why:

1) So many users.

Though Google isn't necessarily new to the neighborhood space (think Google Places), it doesn't have nearly the presence that Groupon does in that area. Google has solid mapping technology and optimized local results within search, but doesn't have the local sales force Groupon has. Instead of having to deal with the headaches tied with building out a competing service from scratch – infrastucture, staffing, promotion, attracting new users – it can pick up Groupon instead, which currently claims some 30 million registered users and adds 1 million more each week. In picking up Groupon, they gain instant access to a thriving user base, one segmented by geography – a sort of "geo-social graph."

"Think about Google Adwords … if they had local business for example," explained Groupon UK managing director Chris Muhr to The Telegraph. "Type in a keyword in Google, say 'bar'. You find a bar in your area. Google then puts up this kind of bubble box that says this is the business and here is the address."

Barclay Capital analyst Douglas Anmuth puts it simply: "Groupon could provide Google direct access to merchants around the world and change the way local deals are delivered going forward."

2) Block the competition

Though Yahoo reportedly failed to acquire Groupon last October with an informal bid of between $3 billion and $4 billion, it doesn't necessarily mean the competition will fail in their attempts also – at least, if the pot is sweet enough. Microsoft could just as easily swoop in and use Groupon to bolster Bing's targeted ads. Facebook could use Groupon's vast merchant directory to expand its own local offerings.

But in buying Groupon, Google will gain a powerful weapon in the battle for web supremacy against Facebook, which is clearly making "local" a priority with the introduction of the Facebook Places check-in feature last August and  Facebook Deals, which lets businesses offer deals when customers check-in via Facebook Places. The fit might be even better than it was for Google's aborted acquisition of Yelp, in that Groupon hasn't worked very hard to develop its own exhaustive local database the way Yelp has -- rather it simply caters to companies and customers that use it. But -- if Google can take Groupon's engaged user and local business data and combine it with their exhaustive local information, they might finally be able to unlock the value of their local efforts.

3) Instant revenues

Though it raised a healthy $170 million in venture funding from investors like Accel Partners, Battery Ventures and DST Global, the site is doing just fine on its own. More than fine, actually: Groupon reportedly pulls in $50 million a month in sales, and when 2010 is said and done, analysts expect total revenues to top $600 million. And with merchant satisfaction at 95% -- more than 50% of them say their Groupon events at the very least, break even -- it's fair to say the deals will keep coming, and arguably, so will the sales. While the revenue won't be a huge chunk on the grand scheme of Google's balance sheet, it won't be a rounding error either. And Groupon has grown at a torrid pace, meaning Google probably feels like it's in a great position, thanks to its own torrid growth a decade earlier, to help the little coupon site that could take their game to the next level. And for a hefty fee, they just might get that chance.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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