Why Groupon Stock Is Surging After OrderUp Acquisition (Nasdaq: GRPN)

GrouponGroupon Inc. (Nasdaq: GRPN) surprised many traders July 16 with the announcement it will purchase on-demand food ordering firm OrderUp.

Groupon stock traded up 3.4% the day the deal was announced. That added to a 6.82% rise so far this week after an analyst at Macquarie Capital USA Inc. hiked the ratings outlook for Groupon as the company shifts its corporate strategy and refocuses on e-commerce. Today (Friday) -- the day after the deal was announced -- GRPN stock remained in the green (0.4%) throughout morning hours.

Still, Groupon stock is still off roughly 40% from its 52-week high, and it's nearly 80% off from the $25 level it held during its 2011 initial public offering (IPO).

The Chicago-based company has a long way to go before it returns to those lofty price levels. A transition to the sales of physical goods instead of discount vouchers is a first step into creating what is known as an "e-commerce marketplace."

You see, in 2014, Groupon Stores ranked 44th in the Internet 2014 Retailer Guide. The company is attempting to boost that rank by relying less on providing discount deals to large amounts of customers and more on selling products directly to the consumer.

In the first quarter of 2015, Groupon looked as though the shift was working in its favor. Its revenue topped analysts' expectations.

However, the stock has been weighed down as the firm has made large promises and hasn't quite delivered...

This acquisition of OrderUp shows the firm is committed to providing shareholder value by expanding into the food delivery markets...

Adding Groupon Stock Value: Why M&A?

Groupon clearly recognized opportunity in the $70 billion food delivery industry. In April, it formally announced it was launching "Groupon to Go," a food delivery service that provided presence in large cities like Chicago.

"Online food ordering and delivery represents an untapped opportunity for Groupon and serves as a natural extension of our local marketplace," said Groupon CEO Eric Lefkofsky in a statement. "The potential in delivery and takeout is apparent -- especially with the growth of mobile -- and OrderUp's operational ability, coupled with Groupon's engaged customer and merchant base, bring tremendous scale to the space."

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The question was how to best go about this new food delivery endeavor.

"Companies have to make a decision when they want to move into a new business," Money Morning Economist Garrett Baldwin said on July 16. "They can either build a division, meaning they can hire a team, build the technical infrastructure, create the relationships, create marketing partners organically... or they can buy a company that is in the space already and has all of the needs in place."

Groupon's trouble was it had to compete with a smaller platform and more limited options than competitors -- notably another Chicago-based company, GrubHub Inc. (NYSE: GRUB), and Yelp! Inc. (Nasdaq: YELP), the owner of restaurant and delivery app Eat24.

Enter OrderUp...

The OrderUp Advantage

Groupon stock

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OrderUp sent this email to customers announcing its deal with Groupon at 6:25 p.m. ET on July 16.

The Baltimore-based company was founded in 2009, although its executives got into the business more than a decade ago. The company's Vice President of Delivery and former COO Jason Kwicien started a food delivery company while a student at Penn State University. OrderUp has a much different model than larger competitors Yelp and GrubHub, and it also has a more pronounced presence in smaller markets where restaurant relationships are more difficult to develop. The company has operations in 26 states and has found great success tapping into cities where a pronounced college population lives.

OrderUp's partnerships provide Groupon with instant access to 63 cities. It has processed more than 10 million orders since its foundation in 2009.

"A lot of analysts have been wondering just how far OrderUp can go," Baldwin explained. "They've said that once you get out of the big markets like Chicago, New York, or Washington D.C., that there isn't a chance to make money. OrderUp has proven the opposite by focusing on places like Charlottesville, home of University of Virginia, or State College Pennsylvania, home of Penn State. OrderUp shows restaurant delivery is a lucrative business in all cities across the country."

With the acquisition of OrderUp, Groupon has the best of both worlds...

"This is a very good deal for Groupon," Baldwin said. "They already have the technical infrastructure in place, and they have already worked with restaurants in the past through their daily deal options, although that never was quite as much a hit. Now they can provide delivery deals, expand into markets where their largest competitors have little presence, and benefit from OrderUp's massive presence in locations outside the country's top urban areas."

While the exact terms of the Groupon-OrderUp deal have not yet been disclosed, OrderUp will continue to operate as a standalone brand with inventory cross-promotion through Groupon's marketplace and merchant pages. The company will also maintain its current Baltimore headquarters.

The Bottom Line: Groupon stock will benefit from Groupon's acquisition of OrderUp. "This deal was a natural extension of what Groupon has already done, and it makes their e-commerce platform more robust," Baldwin said. "With 25 million customers already using Groupon, they are now just flipping a switch and allowing access to more restaurants and giving more choices to customers."

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