Discount deal of the day: One beleaguered ex-unicorn on sale for (at least) 99 percent off peak sticker price.
That’s the thrifty deal Groupon just struck to buy fellow online coupon peddler LivingSocial as the former looks to pare down its own operations to a little more than half its current size.
The merger was announced Wednesday afternoon in a quarterly earnings call with investors.
Once a powerhouse rival to Groupon, the Washington, D.C.-based startup’s value has plunged precipitously from a peak of around $4.5 billion in 2011, bottoming out at somewhere in the low tens of millions or less.
Amazon, which plowed $175 million into the company in 2010, nixed the investment last year and shut down its own competing unit, Amazon Local.
LivingSocial also cut half of its workforce last month for a final head count of 200. In its prime, it employed as many as 4,000 workers.
As the New York Times memorably observed, the startup is “now more unicorpse than unicorn” a riff on the tech industry term for a startup worth more than $1 billion.
Groupon hasn’t fared much better; the company’s stock currently trades at about 85 percent below its price at the time of its debut on the public markets five years ago.
The company wouldn’t disclose the terms of the deal but said it was not “material” meaning the price isn’t expected to have much impact on its bottom line.
The assurance wasn’t enough to soothe wary investors, who plunged share prices down more than 10 percent in after-hours trading on Wednesday despite earnings and revenue that surpassed expectations and an upward year-long trend.
Groupon also plans to shutter all but 15 of its 27 markets over the course of the next two years the latest in a string of layoffs and closures that have racked the company for months.
The sale comes as LivingSocial had been attempting to shift its business from daily deals to other kinds of promotions, like credit card incentives at restaurants. It was also in the process of selling off several foreign companies it had purchased in its lavish prime.
Groupon has similarly tried to escape the decaying market for daily deals with various efforts, including a food delivery service.
Back in their burgeoning heyday, investors viewed the two companies’ discount-matching model as a promising sales driver for local businesses. They were to lead a “daily-deal revolution” that would pump money into the retail industry and bring dead-tree coupon cutters online en masse.
A cocksure Groupon even turned down a $6-billion buyout from Google as it eyed an initial public offering in 2010.
But the hype was mostly just that; it turned out many of the deals each company offered seemed too good to be true precisely because they actually were. Participating shops were seeing gouged incomes as they struggled to meet unrealistic cost cuts.
Hey, look at that. Groupon is buying LivingSocial. Let’s all play Rock Band and break out our first-generation iPhones again.
Eric Wittmershaus (@wittmershaus) October 27, 2016
Customers were also losing interest in the offers emailed daily to their inboxes.
Rakesh Agrawal, an analyst who saw through the business model early on, was unsparing in his assessment of the industry’s prospects even at its peak.
Groupon is not an internet marketing business so much as it is the equivalent of a loan sharking business, he wrote during both companies’ prime in 2011.
While assigning multibillion worth to a company that makes little actual cash or even loses money might seem crazy to the layperson, such practices are part and parcel in Silicon Valley venture capital, where investors oftentimes plunge hundreds of millions into internet startups for years before seeing any dividends.
One reason is that these companies rely on a phenomenon known in economics as a “network effect,” in which services snowball in value as user numbers grow exponentially.
LivingSocial was a casualty of this mentality; fueled by outsized buzz and expectations, the floor of its business model came loose before it could reach the astronomical numbers needed to keep up a viable business.
Its legacy will ultimately be yet another cautionary tale in a valley full of ghosts that similarly smashed into a ceiling.