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There’s Only One Way Left to Squeeze Juice Out of Groupon

Any hopes of a big shareholder payday rests on a GRPN buyout


Groupon (NASDAQ:GRPN) has put together a 60%-plus rally since mid-November, and it’s done so the “fun” way, featuring moves like a 23% surge last Friday, and Monday’s 9% snapback.

It’s enough to make an investor queasy … but it’s probably nirvana for professional traders, it is nirvana.

But why the crazy action?

The catalyst likely was Tiger Global’s November disclosure of a 9.9% stake in Groupon — essentially an “all-clear” sign that it was safe for the fast-money hedge funds to start getting aggressive with GRPN.

But that hasn’t made Groupon any more attractive on a fundamental basis.

Groupon’s core daily-deals business is rapidly breaking down. Merchants already have realized (or are coming around to the fact) that daily deals are costly yet don’t lead to customer loyalty. On the user side, there seems to be growing fatigue at the constant barrage of email offers. And that’s showing up in the numbers — Evercore Partners’ (NYSE:EVR) Ken Sena has recently pointed out that the company’s revenues are falling at a rate of about 20% per quarter!

To make-up for the revenue shortfall, Groupon has quickly built a business to sell physical goods from companies like Dell (NASDAQ:DELL) and Garmin (NASDAQ:GRMN). And while it has gotten traction, the margins are razor-thin, which could put pressure on cash flows.

In light of all this, it seems the only viable option for real shareholder value is Groupon finding a buyer. While possible suitors include Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT), the most intriguing name in the fray is Google (NASDAQ:GOOG).

As I mentioned in a post yesterday, Google does not care about the daily-deals business. Instead, it wants to find a way to get a chunk of the local e-commerce business, and that means it’ll need an extensive sales infrastructure. Groupon’s 6,000 headcount across 40 companies would just do the trick.

That said, despite optimism over last week’s uncomfirmed report, a deal is far from sure thing. Groupon has been a wild company, with several accounting restatements, executive turnover and a business that’s rapidly becoming commoditized. Google’s no slouch and it’s no pauper — it might actually fare better using its huge cash hoard to organically build its own business.

So for investors, the best strategy concerning GRPN is to keep watching the show … from the stands, that is. While traders might be able to make a buck off continued volatility, there probably will be scant gains in the long haul.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”  Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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