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(Bloomberg) — Groupon Inc., a Chicago-based Internet-coupon service with more than 35 million users, walked away from an acquisition offer from Google Inc. yesterday, according to a person with knowledge of the matter.
The proposed acquisition fell through amid hesitation by Groupon's founders, said the person, who requested anonymity because the talks are private. The startup will decide next year whether to sell shares in an initial public offering instead, the person said. The discussions could resume if both sides overcome their differences.
Google had offered $6 billion, including incentives that would be paid to the target's managers if performance targets were met, people familiar with the matter had said this week.
Groupon would have helped its new owner expand in the $133 billion U.S. local-ad market and lessen its reliance on Internet-search advertising.
"Clearly Google wants to get into the local space and Groupon was one way," said Aaron Kessler, an analyst at ThinkEquity LLC in San Francisco, who has a "buy" rating on Google and doesn't own it. "I don't think from a Google perspective that if they miss out, that there's not other ways to get into local."
Groupon Chief Executive Officer Andrew Mason had the biggest say in this decision as largest shareholder, according to another person familiar with the talks. He had concerns about the strategic direction the company would take under new management, the person said. Mason also was concerned about what could happen to merchant relationships and his employees, according to the person.
Google CEO Eric Schmidt had been willing to pay almost twice the $3.2 billion he spent on DoubleClick Inc., his next- most expensive target, to add features and repel a threat from such rivals as Facebook Inc.
Jill Hazelbaker, a spokeswoman for Google, said the company doesn't comment on rumors or speculation. Julie Mossler, a Groupon spokeswoman, also declined to comment.
Google, which boasts $33.4 billion in cash and marketable securities, had initially offered between $3.5 billion and $4 billion to buy Groupon, a person familiar with the matter has said. The startup, which was also contemplating raising new venture funding, held out, eliciting a sweetened offer from Google, the person said.
Google, based in Mountain View, California, rose $1.18 to $573 yesterday in Nasdaq Stock Market trading. The shares have dropped 7.6 percent this year.
The Chicago Tribune initially reported Groupon's rejection.
Groupon's allure has rubbed off on lookalike coupon sites. Amazon.com Inc. said on Dec. 2 it invested $175 million in LivingSocial.com, another provider of daily online deals.
Founded by Mason in 2008, Groupon has attracted 35 million users in more than 300 global markets by offering steep discounts on such items as pedicures, hotel stays and bike tune-ups. The company makes money by keeping part of the revenue raised by the coupons. Groupon's sales may top $500 million this year, two people familiar with the matter have said.
Groupon had a valuation of about $1.3 billion in April, after Digital Sky Technologies led a group that invested in the company. It has raised $170 million from investors, including Facebook backer Accel Partners and New Enterprise Associates.
Google could have used Groupon to gather data on consumers as they interact around the time of a purchase, and then use that information to hone other products, including ads, said Ben Schachter, an analyst at Macquarie Securities Group.
"Locally focused e-commerce transaction data tied to one's Google account could be used to improve personalization of other Google features as well as improve ad targeting," Schachter, who rates the stock an "outperform," wrote in a research note.
Google could also have incorporated Groupon coupons into the location-based services of its Android mobile operating system, said Yun Kim, an analyst at Gleacher & Co. in New York, who rates the stock "neutral" and doesn't own it. For example, as an Android user passes by a mall, Google could deliver coupons for nearby stores.
Still, Groupon was an unusual acquisition target for Google, which tends to buy companies that boast a technological advantage, such as online video, as was the case with YouTube.
To distinguish itself from lookalikes, Groupon plans to test new features that let businesses easily create deals through an online service called Groupon Stores. The company also is testing a feature called Deal Feed that lets users track favorite businesses as they might on blogging site Twitter Inc.
Regulators would probably have scrutinized the planned acquisition of Groupon to ensure it doesn't harm consumers.
"People are going to be concerned about what happens when you link Groupon's daily-deal services to Google search," said Dan Wall, an antitrust lawyer and partner at Latham & Watkins in San Francisco. "It is very easy to imagine that competitors to Groupon will find it very difficult to get oxygen if there's a link between Groupon and Google."