Adapted from “Groupon’s Biggest Deal Ever,” by Frank Sennett, to be published by St. Martin’s Press on June 5. ©2012 by Frank Sennett.
If you believe the rumored numbers, it would have been the biggest acquisition in Internet history—and you definitely should believe the numbers. In the fall of 2010, search giant Google offered nearly $ 6 billion to buy Groupon, the daily-deals site that became the quickest firm to rack up $ 1 billion in sales and the second-quickest, behind video behemoth YouTube, to hit a $ 1 billion valuation.
Online acquisitions didn’t get any bigger than this.
Andrew Mason, the inexperienced CEO hiding a brilliant analytical mind behind a goofball demeanor, turned 30 on Oct. 22 in the midst of dismissing interest from Yahoo . A few weeks later, Google came calling.
Groupon was starting to enter a period of hyper-growth, increasing pressure on Google to raise its bid, which at that point had reached $ 3 billion. But the prospect of a sale was tantalizing to both Groupon’s leadership and its venture-capital investors.
On Nov. 22, Groupon chairman and co-founder Eric Lefkofsky told then-COO Rob Solomon to grab some clean underwear: They were going to California to salvage the deal. They left with that afternoon in a chartered jet from Chicago’s Midway Airport to San Jose.
Mason at that point was seven years out of Northwestern University, where he had majored in music. At six-foot-four, he struck some in Silicon Valley as a taller, more cherubic version of the comedian Dane Cook. When Mason wasn’t intensely focused on solving a business problem, he could disarm even the harshest critic with a warmhearted grin that crinkled his eyelids.
He was highly guarded about his personal life and emotions, which sometimes made him come across as cold to those who reported to him. But Mason was always willing to make himself physically vulnerable for the sake of a comedy bit, such as cultivating bizarre sideburns and performing a boot-scooting boogie as the cowboy-hatted pitchman for a monkey-rental service Groupon rolled out one April Fools’ Day.
Rumpled clothing and unkempt hair gave him a perennial Sunday-morning-in-the-dorm vibe. In fact, he briefly experimented with sleeping in his clothes so he could wake up a bit later in the morning. And he was so committed to defying the business world’s superficial rules of behavior and appearance that he once showed up to lunch with a billionaire decked out in a bright-green tracksuit.
Lefkofsky had already successfully taken other Web companies public, most notably InnerWorkings and Echo Global Logistics, both of which helped other businesses find efficiencies in their supply chains. Half a head shorter than Mason, Lefkofsky had something of a bantamweight boxer’s aspect. He was a trim, youthful 42, and with his dark bushy eyebrows, ever-present glasses, he looked a bit like Groucho Marx without the greasepaint.
The meeting consisted largely of both sides telling each other how great this partnership would be. After observing the niceties, Lefkofsky, Mason, and Solomon were invited into a conference room with a whiteboard, where they negotiated for more than two hours with Google officials until they reached a number—the magic $ 5.75 billion—that they felt comfortable taking back to Groupon’s board.
Around 9 p.m. Mason, Lefkofsky, and Solomon returned to the Rosewood Sand Hill, a luxury hotel in Menlo Park on Sand Hill Road, the fabled street of dreams for seekers of venture capital in Silicon Valley. The trio retired to Madera, the Rosewood restaurant where many a high-tech deal is sealed and celebrated. It was just before closing time, and they had the place all to themselves.
It was a giddy, potentially historic moment. They were heading back to the Midwest in the morning with an astonishing offer for a team of Chicago upstarts who had started fleshing out the idea for a group-buying site just a few years earlier.
The trio finished their drinks and, warmed by the glow of the restaurant’s large fireplace, contemplated futures growing brighter by the moment.
Only one significant hurdle remained: Google couldn’t guarantee the deal would close. The company did offer a sky-high $ 800 million breakup fee, but if antitrust concerns held up the sale for a year to 18 months—and perhaps ultimately led the Justice Department to quash the deal—that would be cold comfort for Groupon. In the worst case, the Chicago company could be crippled.
After the last California trip, Mason and Lefkofsky initiated several tension-packed board calls from Groupon headquarters. The conversations, some of which took place on weekends as the sense of urgency grew, centered around a simple yet exceedingly difficult-to-answer question: Would it be absolutely nuts to turn down this deal?
Groupon had cracked a code the Silicon Valley giants had failed repeatedly to solve: It had hooked local merchants up to a giant e-commerce machine and then delivered the resulting bargains directly to millions of consumers world-wide. Executed properly, this could be one of those once-every-decade business breakthroughs, perhaps on a par with Amazon’s creation of an online-only retail superstore in the 90s.
As the biggest technology firm in the world, Google could provide Groupon with key advantages. Integrating daily deals into the dominant online search product could rapidly increase the reach of those offers. And Google’s respectful post-acquisition management of YouTube suggested Groupon’s team would be able to operate as a truly autonomous business unit, an impression Google did everything it could to reinforce.
So the model worked, in theory. But some of Groupon’s key players, Mason chief among them, had the nagging sense that YouTube had sold itself too early. And even though the offer was nearly four times as large as the one that landed YouTube, the Chicago crew couldn’t shake the feeling that they still might be cashing out too soon.
As the negotiations dragged on, most of the board came around to supporting the sale. But there were a few key voices, such as board member Kevin Efrusy—the man who had led Accel Partners’ investment in Facebook —pushing to see how far Groupon could go on its own. Efrusy was joined in the pro-independence camp by board observer Roger Lee, general partner of VC firm Battery Ventures, another Groupon investor.
By the second half of 2011, less than a year later, Groupon’s gross billings actually topped $ 400 million a month.
By early December, it was time to make a decision. Solomon was fond of telling colleagues that if they turned down the largest deal ever offered to an Internet start-up, they’d ultimately look like either the biggest idiots in the world or the guys with the biggest b—.
Toward the end of the process, Mason brought in Nitin Sharma, a data scientist who worked for Groupon, to make a presentation. Sharma had crunched the numbers and, based on his jaw-dropping projections, Groupon could end up more than 10 times larger if it fully optimized its data processes. He strongly recommended that the company remain independent.
That is when everyone started climbing down off the fence. Lefkofsky was neurotic enough that he might not sleep for the next 18 months if antitrust concerns held up the Google deal, and now these new projections supported the Groupon founders’ gut feeling that they had a lot of running room left with this still largely unexploited commerce model.
In the six weeks during which the Yahoo and Google negotiations played out, the company’s sales had exploded to some $ 50 million a month, twice what they had been just three months earlier.
The leadership team started wondering if gross revenues in 2011 might top $ 1 billion, or even $ 2 billion. It was hard to project how steep the curve might be. The most successful Groupon to date, a Nov. 24, 2010, Nordstrom Rack deal that sold $ 50 gift cards for $ 25 and grossed more than $ 15.6 million (representing about 2.5% of Groupon’s cumulative total sales up to that time), pointed toward strong continued growth on the national retail front.
Add in the fact that international sales were exploding and now accounted for more than half of the company’s revenue. Staying independent started to seem almost irresistible.
Mason and Lefkofsky holed up in a Groupon conference room and talked the proposed deal through one last time. They now believed their company was worth well more than $ 6 billion, but it was difficult to say precisely how much more—unless they chose to believe leaks from New York investment bankers who pegged Groupon’s valuation at anywhere from $ 20 billion to $ 30 billion.
That overheated speculation emerged as competition between Morgan Stanley and Goldman Sachs for lead underwriter status became so intense that Goldman CEO Lloyd Blankfein scheduled a visit to Groupon headquarters for two weeks into the new year so that Blankfein, one of banking’s true masters of the universe, could pitch Mason and Lefkofsky in person.
Ultimately, they concluded the company had so much growth potential, and they were so passionate about the business model, that the only move left was to call Google on Dec. 3 and kill the deal—a deal that likely would have been done if only the search giant had been able to guarantee a close.
“Emerging from that process, it felt like a butterfly emerging from the cocoon,” Mason said. “We went through a period of introspection and self-doubt, and then ultimately emerged in a state of supreme confidence. Like, OK, we’re the best company in the world.”
A version of this article appeared June 2, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Behind Groupon’s$ 6 Billion Brushoff.