"Groupon's Biggest Deal Ever"

A new book has the scoop on why Groupon leaders turned down $6 billion from Google. We speak with author Frank Sennett about the inner workings of one of the internet's fastest growing companies on Chicago Tonight at 7:00 pm.

Sennett says he had "tremendous access" to Groupon's co-founders, executives, and internal memos and e-mails. In Groupon's Biggest Deal Ever, he details Google's nearly $6 billion offer to buy the company in the fall of 2010, and a previous offer from Yahoo! (read the excerpt below for more.)

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The book stems from a TimeOut Chicago cover story Sennett wrote about the Chicago-based daily deals company in 2010.

"I kept my eye on it as it became bigger and bigger," said Sennett, who is the editor-in-chief and president of the magazine. "It just so happened that when my cover story came out, Google had just made the offer. We were going to press as the rumors were circulating. I had never thought about it as a book, but my agent said, 'I think we have a book here.'"

The book ends before Groupon's stock fell to less than half of its initial stock offering. Sennett said he wasn't aware during his reporting of the problems Groupon had in its financial controls that spurred the slip in price.

"The book is a snapshot in time. In three years, it could be the darlings of everybody," Sennett said. "What happened, I think, once they announced the weakness in the financial controls, it spooked investors about how solid the business was. And so it hastened the stock being hammered...Now they have them better in order, they’re taking it very seriously. They came very close to profitability in the first quarter, so I think we may very well be looking at a sustainable business."

Sennett will be at a book readng and signing Thursday night at 7:00 pm at After-Wrods Bookstore, on 23 East Illinois Ave.

Read an excerpt from Sennett's book below:

If you believe the rumored numbers, it would have been the biggest acquisition in Internet history— and you definitely should believe the numbers. In the fall of 2010, online search giant Google offered nearly $6 billion to purchase Groupon, the up-start daily- deals site dubbed by Forbes as the fastest- growing-company ever after it had become the quickest firm to rack up $1 billion in sales and the second- quickest, behind video behemoth YouTube, to hit a billion-dollar valuation.

From early October of 2010, when Yahoo! began targeting Groupon for purchase (more on that— a lot fucking more, as then- Yahoo! CEO Carol Bartz might put it— later), through sale negotiations with Google that lasted into December, the tension on the board ratcheted up to Cuban Missile Crisis levels. Online acquisitions didn’t get any bigger than this.

Andrew Mason, the inexperienced CEO hiding a brilliant analytical mind behind a goofball demeanor, turned thirty on  October 22 in the midst of dismissing Yahoo!’s interest. A few weeks later, Google came calling, contacting Groupon via Allen & Company, one of the investment banks Groupon was working with.

Mason was invited to Google’s large Chicago sales office, along with Groupon chairman and co- founder Eric Lefkofsky, and then- president and -COO Rob Solomon. There they met with Stephanie Tilenius, Google’s head of commerce, and Margo Georgiadis, VP of global sales. Everyone left the session feeling good about a potential team- up.

Negotiations proceeded at a rapid clip after the initial conversation. Mason visited Google founders Larry Page and Sergey Brin at the legendary Googleplex in Mountain View, California. Lefkofsky started working on deal points with Google chief business officer Nikesh Arora. You know that button on Google’s main page that says: “I’m feeling lucky”? Arora was ready to push it. Except that Groupon was starting to enter a period of hyper- growth, increasing pressure on Google to raise its bid, which at that point had reached $3 billion.

By mid- November, negotiations had stalled over the final number, but the prospect of a sale was tantalizing to both Groupon’s leadership and its venture- capital investors. On November 22, Lefkofsky told Solomon to grab some clean underwear: They were going to California to salvage the deal. They left with Mason, product VP David Jesse, senior VP of global operations Nick Cioffi , and Lefkofsky’s investment partner (and fellow Groupon co- founder) Brad Keywell that afternoon in a chartered jet from Chicago’s Midway Airport to San Jose. Even gaining two hours heading west, they didn’t arrive at the Googleplex until after 5:00 P.M.

Mason, Lefkofsky, and Solomon  were quickly shown to Arora’s office, where they  were joined by Web godfather Eric Schmidt, Google’s CEO at the time and now the company’s executive chairman, along with Page (who took back the CEO reins from Schmidt two months later), and deal architect David Drummond, Google’s senior VP of corporate development. It was a high- wattage meeting by any measure.

Mason at that point was seven years out of Northwestern University, where he had majored in music. At six- foot- four, he struck some in Silicon Valley as a taller, more cherubic version of the comedian Dane Cook. When Mason wasn’t intensely focused on solving a business problem, he could disarm even the harshest critic with a warmhearted grin that crinkled his eye-lids. He was highly guarded about his personal life and emotions, which sometimes made him come across as cold to those who reported to him. But Mason was always willing to make himself physically vulnerable for the sake of a comedy bit— such as cultivating bizarre sideburns and performing a boot- scooting boogie as the cowboy- hatted pitchman for a monkey- rental service Groupon rolled out one April Fool’s Day. Rumpled clothing and unkempt hair gave him a perennial Sunday- morning- in- the- dorm vibe— in fact, he briefly experimented with sleeping in his clothes so he could wake up a bit later in the morning— and he was so committed to defying the business world’s superficial rules of behavior and appearance that he once showed up to lunch with a billionaire decked out in a bright- green tracksuit. But he did own business suits as well, and he cleaned up nicely when he wore them— not that he cared if anyone thought so.

Lefkofsky had already successfully taken other Web companies public, most notably InnerWorkings and Echo Global Logistics, both of which helped other businesses find efficiencies in their supply chains. Half a head shorter than Mason, Lefkofsky had something of a bantamweight boxer’s aspect, the physical impression of coiled energy underscored by the fact that he was not afraid of conflict. He was a trim, youthful forty-two, and with his dark bushy eyebrows, ever- present glasses, and gray- blue eyes that conveyed both wry wit and sharp intelligence, he looked a bit like Groucho Marx without the greasepaint. Add in facial hair that just barely exceeded the definition of stubble and a wardrobe that consisted mostly of jeans, casual button- up shirts, and muted sweaters and you had the very portrait of an online mogul who seemed increasingly comfortable with himself.

Solomon also had been around the block a few times: Now in his early forties, he had enjoyed a six- year run growing revenues as the head of Yahoo! Shopping and became a corporate officer at Yahoo! An easygoing, well- liked, shaggy- haired former Berkeley water polo player who knows his way around a surfboard, he moved to travel start- up SideStep as president and CEO in 2006, overseeing its sale the next year to rival Kayak for $200 million, and then served a stint at VC firm Technology Crossover Ventures.

Still, this was a plunge into the deep end of the pool for all of them.

The meeting consisted largely of both sides telling each other how great this partnership would be. After observing the nice-ties, Lefkofsky, Mason, and Solomon  were invited into a conference room with a whiteboard, where they negotiated for more than two hours with Arora and Drummond until they reached a number— the magic $5.75 billion— that they felt comfortable taking back to Groupon’s board.

Around 9:00 P.M., Mason, Lefkofsky, and Solomon returned to the Rosewood Sand Hill, a luxury hotel in Menlo Park on Sand Hill Road, the fabled street of dreams for seekers of venture capital in Silicon Valley. The trio retired to Madera, the Rosewood restaurant where many a high- tech deal is sealed and celebrated. It was just before closing time, and they had the place all to themselves.

Lefkofsky marked the occasion with the premium tequila he’s fond of, Solomon toasted him with a few fingers of Scotch, and Mason had red wine. It was a giddy, potentially historic moment: They were heading back to the Midwest in the morning on a glide path to being Google’s biggest- ever acquisition. It was an astonishing outcome for a team of Chicago upstarts who’d started fleshing out the idea for a group- buying site just a few years earlier. The trio finished their drinks and, warmed by the glow of the restaurant’s large fireplace, contemplated futures growing brighter by the moment.

Only one significant hurdle remained: Google couldn’t guarantee the deal would close. The company did offer a sky-high $800 million breakup fee, but if antitrust concerns held up the sale for a year to eighteen months— and perhaps ultimately led the Justice Department to quash the deal— that would be cold comfort for Groupon. In the worst case, the Chicago company could be crippled. Stuck in limbo, it wouldn’t be able to make key hires and strategic acquisitions to supercharge growth, and it couldn’t go after new customers as aggressively as needed. Lefkofsky devoted two full weeks to building a workable contract from the term sheet, but without that guaranteed close, no one was comfortable with the deal. Meanwhile, the prospects for Groupon successfully staying independent were looking increasingly rosy.

After the last California trip, Mason and Lefkofsky initiated several tension-packed board calls from Groupon headquarters. The conversations, some of which took place on weekends as the sense of urgency grew, centered around a simple yet exceedingly difficult- to- answer question: Would it be absolutely nuts to turn down this deal? One thing’s certain: The negotiations forced Groupon’s leaders to explore the depths of the gold mine they were sitting on.

Those kinds of figures tend to focus the mind.

Groupon had cracked a code the Silicon Valley giants had failed repeatedly to solve: It had hooked local merchants up to a giant e-commerce machine and then delivered the resulting bar-gains directly to millions of consumers worldwide. Executed properly, this could be one of those once- every- decade business breakthroughs, perhaps on a par with Amazon’s creation of an online- only retail superstore in the nineties. But if Groupon was a special company, Google’s offer was pretty damn special, too.

As the biggest technology firm in the world, Google could provide Groupon with key advantages. Integrating daily deals into the dominant online search product could rapidly increase the reach of those offers. And Google’s respectful post- acquisition management of YouTube suggested Groupon’s team would be able to operate as a truly autonomous business unit, an impression Google did everything it could to reinforce.

So the model worked, in theory. But some of Groupon’s key players, Mason chief among them, had the nagging sense that YouTube had sold itself too early. And even though the offer now on the table was nearly four times as large as the one that landed YouTube, the Chicago crew couldn’t shake the feeling that they still might be cashing out too soon. But every argument against consummating the deal kept butting up against one number: 6 billion.

As the negotiations dragged on, most of the board came around to supporting the sale. Among the leadership team, Lefkofsky also leaned toward selling, Solomon was ready to accept either outcome, and Mason expressed both a desire to keep running the company and a willingness to go with Google if it could speed Groupon toward its goal of creating a new ecosystem for local commerce. If the majority shareholders wanted to sell, Mason could get excited about the ways in which the search leader might help his company grow, even though he was nervous about the fact that such acquisitions often fail.

But there were a few key voices— such as board member Kevin Efrusy, the man who’d led Accel Partners to invest in a nascent Facebook— pushing Groupon to see how far it could go on its own. Efrusy was joined in the pro- independence camp by board observer Roger Lee, general partner of VC firm Battery Ventures, another Groupon investor.

German entrepreneur Oliver Samwer, a big Groupon equity holder thanks to the sale of his European CityDeal clone to the company earlier that year, swung back and forth on the question like a weather vane in a tornado. Some days he’d insist on selling to Google at once; on others he’d argue that Groupon must remain independent because it soon could be churning $200 million a month in gross sales, way up from the $50 million it was doing at the time. The projected sales number seemed crazy, and by most standards it was. But by the second half of 2011, less than a year later, Groupon’s gross billings actually topped $400 million a month.

By early December, it was time to make a decision. Solomon was fond of telling colleagues that if they turned down the largest deal ever offered to an Internet start- up, they’d ultimately look like either the biggest idiots in the world or the guys with the biggest balls. Toward the end of the process, Mason brought in Nitin Sharma, a data scientist who worked for Groupon, to make a presentation to Lefkofsky, Keywell, and Solomon. Sharma had crunched the numbers and, based on his jaw- dropping projections— Groupon could end up more than ten times larger if it fully optimized its data processes— he strongly recommended that the company remain independent.

That’s when everyone started climbing down off the fence. Lefkofsky was neurotic enough that he might not sleep for the next eighteen months if antitrust concerns held up the Google deal, and now these new projections supported the Groupon founders’ gut feeling that they had a lot of running room left with this still largely unexploited commerce model.

In the six weeks during which the Yahoo! and Google negotiations played out, the company’s sales had exploded to some $50 million a month— twice what they had been just three months earlier. The leadership team started wondering if gross revenues in 2011 might top a billion dollars— or even $2 billion.

It was hard to project how steep the curve might be. The most successful Groupon to date, a November 24, 2010, Nordstrom Rack deal that sold $50 gift cards for $25 and grossed more than $15.6 million (representing about 2.5 percent of Groupon’s cumulative total sales up to that time), pointed toward strong continued growth on the national retail front. Add in the fact that international sales were exploding and now accounted for more than half of the company’s revenue and staying independent started to seem almost irresistible.

Mason and Lefkofsky holed up in a Groupon conference room and talked the proposed deal through one last time. They now believed their company was worth well more than $6 billion, but it was difficult to say precisely how much more— unless they chose to believe leaks from New York investment bankers who pegged Groupon’s valuation at anywhere from $20 to $30 billion. That overheated speculation emerged as competition between Morgan Stanley and Goldman Sachs for lead underwriter status became so intense that Goldman CEO Lloyd Blankfein scheduled a visit to Groupon headquarters for two weeks into the new year so that Blankfein, one of banking’s true masters of the universe, could pitch Mason and Lefkofsky in person.

Ultimately, they concluded the company had so much growth potential, and they  were so passionate about the business model, that the only move left was to call Google on December 3 and kill the deal— a deal that likely would have been done if only the search giant had been able to guarantee a close. After Lefkofsky confirmed Keywell and Solomon’s support for the plan, he pulled the plug.

“Emerging from that process, it felt like a butterfly emerging from the cocoon,” Mason said. “We went through a period of introspection and self- doubt, and then ultimately emerged in a state of supreme confidence. Like, okay, we’re the best company in the world.”

That’s not how it looked from the outside, though. Groupon’s rejection of Google sent heads spinning in Silicon Valley and shocked the rest of the world, even as it whetted the appetites of the banks for a Groupon IPO that might eclipse Google’s own.

Was it hubris that led Groupon to remain independent? Seemingly millions of people drew that conclusion. And it’s true that $5.75 billion would have represented an eye- popping payday for a two- year- old start- up. After all, Google had landed YouTube for the bargain price of $1.65 billion in 2006 and then picked up online advertising power house DoubleClick for $3.1 billion a year later. Auction site eBay had earlier set the online- acquisition bar by paying $2.5 billion for videophone service Skype in 2005. Even accounting for inflation, Groupon would have set the all- time private cash- out mark for a Web start- up if it had only said yes to Google.

But with the steep revenue trajectory management saw in late 2010, they knew there was a significant possibility that if and when Google finally delivered the big check, Groupon’s founders could be selling at a discount much steeper than the half- off sushi, mani-pedi, and boat-tour deals the company was known for.
Even so, no one would have criticized Groupon for taking the money.

As the year drew to a close and serious competition began to emerge in the daily deals space, only one question remained: Would Groupon’s $6 billion gamble pay off?

Excerpted from Groupon's Biggest Deal Ever by Frank Sennett. Copyright 2012. Saint Martin's Press.


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