Report: Daily Deal Acquisition Activity Way Up & Valuations Way Down

M&A activity in the Daily Deal space has accelerated with Q2 2011 and Q3 2011 (through just its first 2 months) on pace to exceed all the cumulative M&A activity seen in the industry since 2009.  Since 2009, 72 acquisitions have occurred in the daily deal space with 44 in just Q2 and Q3 2011.

But while daily deal acquisition activity has climbed significantly in recent quarters, valuation multiples for transactions have been dropping – quickly and significantly.  Acquisition multiples on a Price per Subscriber and Price per Voucher Sold basis have dropped 36% and 40% respectively since their peak hit just two quarters ago in Q1 2011.

Also, based on the observed M&A multiples in private company transactions, the implied valuations of Groupon and LivingSocial are significantly below rumored IPO valuations and even recent secondary market transactions.

But despite the recent spate of negative sentiment and falling valuations, the enthusiasm for the space remains steady with a significant number of rumored entrants still eyeing the daily deal space.
The infographic below summarizes key findings of the report and is followed by the report’s executive summary.  If you’d like to download the entire report with all the valuation multiples, acquisition transactions and details on the the acquirers, investors, targets and rumored entrants into the space, you should go here.

Executive Summary

This report constitutes the Daily Deal industry’s most detailed and comprehensive report on M&A transactions, M&A valuation multiples, transaction deal terms and investment funding trends.  The report has significant amounts of data and statistics as well as details on all the acquirers, acquisition targets, investors and rumored entrants into the daily deal industry.

Below are four key takeaways which emerged after an analysis of the data and numerous acquirers, investors and acquisition targets in the daily deal industry.

1. Daily deal M&A activity is climbing significantly
2. Valuation multiples are dropping – quickly and significantly
3. Groupon and LivingSocial’s implied valuations based on private company M&A multiples are significantly below rumored IPO valuations and secondary market transactions
4. Despite negative sentiment, there remain a significant number of rumored entrants into the space

Daily Deal M&A Activity Level is Climbing

M&A activity in the Daily Deal space has accelerated with Q2 2011 and Q3 2011 (through just its first 2 months) on pace to exceed all the cumulative M&A activity seen in the industry since 2009.  Since 2009, 72 acquisitions have occurred in the daily deal space with 44 in just Q2 and Q3 2011.

The driving forces behind the increased M&A activity are:

1. Efforts by new players to enter the daily deals space
2. Land grab by incumbents in the space to enter new markets or enhance existing markets
3. Talent and technology acquisitions to create differentiation for daily deal companies
4. A financing slowdown making M&A a last and only option for many daily deal companies

Valuation Multiples Are Dropping – Quickly and Significantly

Looking past just the headline M&A transaction numbers, it becomes apparent that things are not going swimmingly in the daily deal space.  A closer examination of recent acquisition prices reveals that M&A valuation multiples are declining very quickly.

Since their peak hit just two quarters ago in Q1 2011, the Price per Subscriber and Price per Voucher Sold multiples paid in private company M&A transactions have declined 36% and 40% respectively in Q3 2011.

The decline in valuations is driven by:

• An oversupply of daily deal companies
• Increasingly negative sentiment about the daily deal space which increased significantly after Groupon’s S-1 provided some visibility into daily deal economics
• Investor reticence about the daily deal space

An oversupply of daily deal companies

Because the daily deal business is a relatively easy one to enter (translation: cheap) due to relatively low technological barriers, there is currently an oversupply of daily deal companies.  Many of these companies are at the relatively early stages meaning that subscriber counts, vouchers sold and technological differentiators are insignificant.  As a result, many of these firms look alike and are not significantly differentiated from one another.  From an acquirer perspective, this provides options and leverage.

Increasingly negative sentiment about daily deal space

In 2010, the commentary about Groupon was effusive with the company being tagged as the fastest growing company ever.  That ebullience turned to derision quickly when Groupon filed its S-1 and a variety of skilled (and unskilled) analysts opined on the company’s prospects.  The sentiment amongst these analysts was almost universally negative.

Based on conversations, this negativity has made acquisition targets more “flexible” and in some instances, desperate to do a deal.  The negative sentiment has also tempered acquirer enthusiasm for the space so while they might still believe in the business model, their exuberance for the daily deal space may be a bit tempered.

And of course, Groupon’s S-1 provided some transparency into the financials of the world’s largest daily deals company.  Unfortunately, Groupon’s S-1 created more questions than answers about how daily deal companies can make money and the viability of the business model longer-term.

Investors becoming reticent about the daily deal space

With the litany of negative news about the group buying space, an oversupply of daily deal companies and falling valuation multiples and larger economic uncertainty, the eclectic mix of investors (VCs, private equity, hedge funds, angels, corporates) who’d earlier jumped in on the daily deal space are wondering what’s next.  To-date, 180 different investors have made at least one investment in the daily deal space with several making multiple bets on players in the space.

Investment activity in the space reached stratospheric levels in Q2 2011 and has fallen back to earth in Q3 2011 (but is still largely in line with historic levels).  The chatter amongst investors, however, suggests the trend could continue downward.  Why?

While the technical barriers to entry in daily deal business are low, scaling the business requires significant amounts of capital.  Hiring armies of sales staff and account managers is necessary to develop relationships with merchants, and this is expensive.  And so before throwing more money at the daily deal space, investors want to see that the model works.

The evidence that the model works appears to rest largely on Groupon and LivingSocial.  A successful IPO by either or S-1 filings which show healthy financials and which don’t see universal ridicule  by analysts and the media would go a long way in reinstating some faith in the daily deal space.

Of course, general macro-economic concerns, stock market volatility and their potential implications for consumer spending are not helping.

With investor interest in funding “another daily deals site” declining, companies are facing uncertainty about whether their next round of financing will be available.  As a result, M&A is increasingly being viewed as a credible (or only) option.  However, with fundraising oxygen becoming less plentiful, the leverage lies with acquirers.

Implied Valuations of Groupon and LivingSocial Are Well Below Speculated Amounts

Using the observed private company acquisition multiples and applying them to Groupon and LivingSocial based on their subscriber and vouchers sold numbers allows implied valuations for the two daily deal behemoths to be calculated.  And these implied valuations are significantly less than IPO valuations that have been speculated for the companies.  In fact, the implied valuations are actually far less than some of the valuations seen in secondary market transactions that have occurred in the recent past.

With Groupon’s roadshow and IPO coming soon (as of now at least), it will be interesting to see how they price their IPO and their expected valuation relative to private company comparables on both a price per subscriber and price per voucher basis.

Despite negative sentiment, there remain a significant number of rumored entrants into the space

Even though much of the data and sentiment about the daily deals industry is not great, there remains a healthy stable of firms rumored to be eyeing the space and for whom, acquisition may be a preferred method of entry or enhancement.  Given declining valuations and increasd acquirer leverage, they may actually see increased opportunity to jump into the fray.

The firms rumored to be interested in the daily deal space (we’ve identified 30 in the report) fall into a few distinct buckets.  There are some ecommerce retailers and online advertising firms who’ve expressed interest, but the vast majority of rumored interest comes from private flash sales companies, mobile/web coupon companies, and firms managing/enabling rewards programs.

Flash Sales offer limited quantities of primarily luxury goods to members, and a daily deal capability may offer them a way to extend their relationships with customers.  Notably, Gilt Groupe, a prominent flash sales firm, has already entered the daily deal space through an acquisition.

Mobile/web coupon companies which include online coupon providers or aggregators and mobile couponing companies can use daily deals as an entry point into the hyper-local discounting segment.

Rewards programs which offer consumers rewards for shopping at merchants see daily deals as a potential natural extension to their offerings to merchants with whom they already possess relationships.