Deals Company Valuations Are Plummeting: Report
BY E.B. BoydToday
Fast Company
September 20, 2011
A new study says the daily deals field is glutted with copycats, and it’s up to Groupon and LivingSocial to prove the model works.
Success breeds nothing if not copycats, and few industries have seen more imitators in the last 12 months than the daily deals space. New companies pop up every week, some purporting to specialize in certain niches, others in particular geographies. According to Yipit, 53 new deal sites launched in August alone.
But companies looking for hefty exits might be sobered by a new report on acquisition activity in the deals space. According to the 2010-2011 Daily Deal M&A Activity and Valuation Multiples Report, from CB Insights, the price of acquisitions has been plummeting.
“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 report says.
Part of the reason is that there are simply too many companies out there, the report says. As Fast Company pointed out earlier this month, technology is no barrier to entry in this space, and so it’s relatively easy to hang out a shingle. That, says the report, has produced “an oversupply.”
“Many of these companies are at the relatively early stages meaning that subscriber counts, vouchers sold and technological differentiators are insignificant,” the report says. “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.”
The report did, however, include some observations that could be good news for Groupon, LivingSocial, Google Offers, and Amazon Local. It said the negative press following Groupon’s S-1 filing and the subsequent questions about the financial viability of the space, combined with the glut of deals companies, are making some investors skittish about tossing more money into this industry right now.
“While the technical barriers to entry in the daily deal business are low, scaling the business requires significant amounts of capital,” the report says. “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.”
All four of those companies have the necessary resources to scale. But the report says the lion’s share of the burden for proving that the industry can work lies largely on Groupon and LivingSocial’s shoulders.
“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,” the report says.
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