Secondary Market Buyers Should be Worried about Groupon Based on Recent M&A Valuations

Buyers of Groupon shares on secondary markets might feel like they’re getting a bargain given the fall in Groupon’s speculated valuation, but recent daily deal M&A valuation multiples suggest that even the relatively cheaper price for Groupon they paid may have still been excessive vs. comparable transactions.

For those following the bouncing ball that is Groupon’s speculated valuation, you may remember that following the June announcement of Groupon’s upcoming IPO, the valuation was rumored to be in the $25 to $30 billion range.  Following an onslaught of bad news, executive departures and critical financial analyst commentary, the sentiment on the company’s prospects has soured markedly.  And all the negativity has resulted in $10-$15 billion of rumored market value being lost as recent secondary market transactions pegged the company’s  valuation at $14.9 billion.  These transactions were reported to be occurring on SharesPost which competes with SecondMarket in the market to trade equity in illiquid private companies.

While secondary market buyers of Groupon may believe the $10-$15 billion haircut they saw resulted in them getting a bargain, recent M&A transaction valuation multiples suggest not only that that they may have overpaid but that they overpaid by a lot.  An evaluation of 72 daily deal M&A transactions and associated price per subscriber and price per voucher paid multiples show that valuation multiples in the daily deal space are falling quickly.  In fact, from their peak in Q1 2011, the two valuation multiples have fallen 36% and 40% respectively in less than two full quarters.

When we apply those observed acquisition valuation multiples to Groupon and the #2 player in the space, LivingSocial, the valuations are significantly less than rumored IPO valuations.  They’re also significantly less than recent secondary market transactions which could mean bad things for secondary market purchasers hoping to cash out when Groupon goes public.