Hot Stocks: Google Inc. (Nasdaq: GOOG) Spreads Beyond Search With Groupon Bid

Google Inc. (Nasdaq: GOOG) is gunning for even greater Web dominance in 2011 by announcing an aggressive move in the online advertising industry, as well as a game-changing entrance into the rapidly growing e-book market.

Google is close to sealing a deal to buy online coupon company Groupon for $5.3 billion, according to people familiar with the matter. This would be Google's biggest purchase to date. The two-year-old Groupon's popularity has skyrocketed since its November 2008 start, making it a target for Internet companies wanting a stronger hold on local advertising.

"This would basically get Google the feet on the street for what they would never build themselves," Jason Helfstein, an Oppenheimer & Company (NYSE: OPY) analyst, told The New York Times.

Retailers pair with Groupon hoping the promotion will draw new customers. Instead of typical advertising where a company pays for an ad to encourage its business, Groupon retailers don't pay unless customers use the e-coupons, which have been wildly successful in some cases. A promotion by The Gap Inc. (NYSE: GPS) last summer generated one-day revenue of $11 million.

Google is eager for the deal to gain specific insight into consumer spending habits as well as a sales force with close ties to local merchants. With access to local business information, Google could enhance offerings like its mapping service and customer reviews. It would also gain access to contact information for 12 million Groupon users, including credit card information and frequently purchased coupons.

The deal also could help Google strengthen its social networking line, which it has failed to develop against powerful rival The popularity of Mark Zuckerberg's creation allows news to spread rapidly across friend and business networks, perfect for companies trying to gain attention without spending top dollar on advertising.

But more importantly, Google is afraid of what its competition would do with Groupon if the company remained on the market. Companies like Facebook and Yahoo! Inc. (Nasdaq: YHOO) are competing for the biggest share of the local advertising market as the industry continues its rapid growth. Local businesses spent about $20 billion on online advertising this year, according to media advisory firm BIA/Kelsey, and that should rise to more than $35 billion by 2014.

Danny Sullivan, editor of industry blog Search Engine Land, said when it comes to Groupon, Google's asking itself, "What's the price of not buying it?"

But Google's investors are concerned about the steep price the company is willing to pay for Groupon, which in April was valued at $1.4 billion - about a quarter what Google is said to be offering.

"A multibillion-dollar valuation for a company that is in a business with virtually no barriers to entry and is younger than my toddler is absurd," Forrester Research Inc. (Nasdaq: FORR) analyst Sucharita Mulpuru wrote in a note to clients on Tuesday.

Mulpuru said it would be hard for Google to offer the Groupon service to more retailers through an automated search for advertising because it would have less control over the quality of deals.

Sources close to the matter told The Wall Street Journal that Groupon's board of directors would hold a conference call Wednesday to decide how to proceed. Groupon founder Andrew Mason refused to comment on the deal, but sources speaking on the condition of anonymity to The Times said the deal could be closed as early as this week.

Alternatives to taking the Google deal include Groupon pursuing an initial public offering.

Analysts estimate Groupon has annual revenue of more than $500 million. It has 35 million subscribers worldwide in 300 markets. Its fast growth allowed it to expand from 200 employees to 3,100 in 11 months.

Groupon continued its growth this week amid acquisition speculation, announcing Tuesday it was buying three "daily deal" Web sites - uBuyiBuy, Beeconomic and Atlaspost - operating in Taiwan, Singapore and Hong Kong, to expand into East and Southeast Asia.

An E-Book Market Game Changer

Google also announced this week that its long-awaited online bookstore would be open by the end of this year. The e-book market is expected to grow to $966 million a year from $301 million in 2009, according to Forrester Research.

In an effort to snag market share from Internet powerhouse Inc. (Nasdaq: AMZN), which holds an estimated 65% of the e-book market, Google Editions will operate on a "read anywhere" model for use on most devices with a Web browser. In an approach different than that of competitors, users can buy books from Google or multiple online retailers, collect them in a library set up through a Google account and read them on a variety of devices.

Users of's Kindle purchase books only through Amazon, and can read them only on devices running Kindle software. They can also access free books from other sources.

Analysts think Google's strategy of not linking its online bookstore with a specific e-reader device could give it a market advantage as the number of gadgets used for online books grows in coming years. 

Google has already signed deals with many major book publishers, and more than 200 independent booksellers in the United States could sign up, according to the American Booksellers Association. Independent stores that can't afford to open their own e-bookstore can install Google technology on their Web sites and receive a percentage of revenue from books sold.

Since Google's search engine attracts 190 million U.S. Internet users per month, according to comScore Inc. (Nasdaq: SCOR), analysts think it could make significant waves in the e-book market.

"Google is going to turn every Internet space that talks about a book into a place where you can buy that book," Dominique Raccah, owner of independent publisher Sourcebooks Inc., told The Journal. "The Google model is going to drive a lot of sales. We think they could get 20% of the e-book market very fast."

Credit Suisse Group AG (NYSE ADR: CS) analysts said Google's e-book venture combined with Apple Inc.'s (Nasdaq: AAPL) use of the iPad and online iTunes store could reduce's market share to 35% over the next five years, down from 90% in early 2010.

Regulatory Roadblocks

The European Commission is launching a formal inquiry into allegations that Google is manipulating search results.

The investigation will try to determine if Google is intentionally lowering the rank of unpaid search results that could lead users to competitors' sites. It's also looking into claims that Google places exclusivity obligations on its ad partners, preventing them from posting certain competitors' advertisements on their sites.

Google said after the European Union's announcement that it has never intentionally hurt competing services and that there are "compelling reasons" why complaining sites were "ranked poorly by our algorithms."

Google is already facing heat from online travel firms that are trying to block Google's acquisition of ITA Software, which organizes flight information for online search. The firms say Google's ITA ownership would give it too much power over the industry.

Google might be facing more U.S. regulatory roadblocks after the European Commission's announcement this week.

"You may well see something soon from the U.S. agencies, but I can't promise anything," said Melanie Sabo, the assistant director for anticompetitive practices at the Federal Trade Commission's Bureau of Competition.

As Google continues its expansion and enters more industries, it's likely to face even more scrutiny.

"The more Google acquires, the more antitrust issues they are opening themselves up to," an anonymous source told Reuters. "That has to be considered."

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