Groupon’s Latest (And Greatest?) Comeback

Since going public in late 2011, the sailing has not exactly been smooth for Team Groupon.

When its IPO launched in Nov. 2011 — about six months before Facebook’s — it was the biggest public offering the tech sector had seen since 2004. And it was a big IPO; Groupon raised $700 million in the morning and logged a $12.7 billion valuation that same day.

How the mighty have fallen.

Flash forward about five years, and things are somewhat less cheery. Shortly after Groupon’s IPO — after one final big holiday season — the firm’s share price began a meteoric descent that has left its market capitalization hovering around the $2 billion mark.

In some way, Groupon got unlucky. Consumers fell out of love with daily deals with the same rapidity they fell in love with them. Groupon also made some bad choices. A big site redesign left regular users cold and confused in 2012; this was a move away from the failing daily deals which the company then had to move back to when the site’s dwindling remaining customers complained.

And then, there was the thing that was neither bad luck nor bad choice: Amazon and its increasingly expansive definition of what business it is in. Amazon decided to be in the business of everything and, along the way, consolidated a massive amount of the online and marketplace commerce going on in the U.S. Who needs a daily deal when you can get great prices every day and same-day/two-day delivery with Amazon?

Groupon stuck, more expectedly, to eCommerce, which ended up being the wrong competitive move but not really one anyone could fault it for. No eCommerce firm in history has ever acted quite like Amazon.

However, whether a bad result is an outcome related to bad luck, poor choice or a black swan named Amazon, the reality is that, in business, poor results bode, well, poorly for a company’s continued existence. Which explains why Groupon’s executives have been reading their firm’s obituary written across tech and retail headlines for the last two or three years.

A not totally unfair outcome given that the firm is worth only a little more than 10 percent of what it once did in 2011.

For the first time in quite a while, however, Groupon got some good news last week: a big investment from Alibaba and some resulting positive motion on its stock price.

So, what does it all mean? Is it yet another new beginning for Groupon or the beginning of a graceful ending via acquisition by a Chinese firm struggling to gain a solid foothold in U.S. eCommerce?

Alibaba Grants Some Wishes

In a move that was apparently widely expected by no one last week, Alibaba announced that it had acquired a 5.6 percent stake in Groupon — about 33 million shares. That is a big vote of confidence for a firm that has lost over 60 percent of its stock price in the last year alone.

So, they were cheap shares, but still.

But then, Alibaba, it is fair to note, is also the victim of some bad luck, some bad choices and some unprecedented events (like the Chinese economy abruptly running out of gas). It even knows a little something about seeing one’s stock price take a hit. Alibaba raised $25 billion on a $200 billion+ valuation in the largest IPO in the history of the NYSE — only to see that value shrink down to ~$164 billion today.

Now, in fairness, $164 billion is probably not cause for mourning or a particularly compelling reason to throw a fundraiser for Jack Ma, but a ~$50 billion dollar hit is still real money by any rational calculation.

Affinity or similar narrative, however, usually play a pretty small role in big investments, as Ma is the CEO of a firm on a mission to become the world’s biggest eCommerce player. Being charitable to eCommerce failures on the verge of failing is probably not a habit he wants to get into.

So, why throw in with Groupon?

Groupon, for all its difficulties, still has ~50 million active users in the United States. It is also far and away the biggest player in the daily deals space, with 52.2 percent of the market, as opposed to its nearest competitor, LivingSocial, which holds about 16 percent.

And, as mentioned, the purchase was cheap, relatively speaking. Alibaba managed to snap up over 5 percent of the firm and 33 million shares for less than $100 million, given Groupon’s current sub-$3 stock price.

So, Alibaba got a window into a market it desperately wants to crack — even though it says it doesn’t — for a bargain basement price.

“We bought a very small minority stake in Groupon in order to share ideas between U.S. and China markets,” Alibaba said in a statement. “This is a passive holding, and if Groupon management would like to exchange experiences with us, we are prepared to share.”

A Groupon spokesperson noted that, though Groupon was not aware of the holding by Alibaba until the SEC filing made it public, it was nonetheless excited to work with the Chinese eCommerce megaplayer.

What’s Next — The Short Term

The investment from Alibaba comes as Groupon is in the middle of a year-long effort to rebrand itself away from “daily deals” and into “marketplace commerce” (that features daily deals, among a number of other promotional methods). The markets liked the announcement of Alibaba’s vote of confidence. Groupon’s stock price bounced over 40 percent on the news and has remained in the $4+ area for over a week.

It is not the $12 a share that the firm was getting at its IPO, but it is the first strong sign of a rally in some time.

“The good news from Alibaba in the filing comes as Groupon is in the midst of a process of reintroducing ourselves to our customers and to new users who will be our customers someday.”

That reintroduction has involved a new CEO; Cofounder and first Chief Executive Eric Lefkofsky was replaced by Groupon’s board with Rich Williams. The firm has also launched an aggressive marketing campaign and pulled back its international efforts from 170 nations to just 23.

“Groupon is a more focused product than it used to be. We expect that consolidation to continue.”

What’s Next — The Long Term

Alibaba has said its interest is limited; it has no plans to acquire Groupon at present. But Alibaba also says it has no interest in doing business in the U.S., except to make it easier for its Chinese customers to get U.S. goods.

The firm’s extensive investments in Groupon, Jet.com and Lyft, among others, indicate that perhaps there is more to it than just that.

What does seem clear, however, is that, for the first time in a long time, Groupon is worth watching for reasons other than rubbernecking. We’ll keep you updated.