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GOING PUBLIC

What You Can Learn From Groupon's IPO Missteps

It's been a rocky road to going public for Groupon, which has faced scrutiny from investors, analysts, and the SEC leading up to its October 24 IPO road show.

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Scott Sweet, the senior managing partner of IPO Boutique, a Tampa-based firm that advises companies on the road to going public, says that in his 39 years of analyzing initial public offerings, he's never seen anything like this.

"It's almost comical," Sweet says, referring to Groupon's proposed initial public offering that began with its S-1 filing in June. "Groupon has shot itself in the foot by its cartoon-like management and the choices it has made."

He's right.

Over the last four months, the company, which has 100 million subscribers across 45 countries, has faced growing scrutiny from the Securities and Exchange Commission for its newfangled accounting practices, which have led to substantial investor fears. There's also a mounting suspicion that "the world's fastest growing company" might be hitting a roadblock as it fends off competition. As of May, for instance, data collected by Yipit, which monitors the daily deal industry, reported that there were nearly 550 daily deal companies operating in the U.S. market. (Who can blame them? Groupon holds no patents and there are very few barriers to entry.) 

There have been ethical concerns about the company's management, too. According to company documents, in January 2011, the company issued about 30 million shares of stock to a group of third-party investors in exchange for $946 million in cash. As part of the deal, co-founder Eric Lefkosky, whose checkered reputation in Silicon Valley has raised eyebrows, took home about $319 million.

Not bad for a company that lost $413 million in 2010.

And finally, all eyes have turned to Andrew Mason, Groupon's 31-year-old CEO, who once paid a man to dress up like a ballerina in the office, who propagates false rumors about himself owning 20 cats, and who films himself doing yoga in his underwear.

The big question, analysts seem to be wondering, is whether he'll be able to make nice with investors and overcome his image problems during Groupon's roadshow, which will kick off Monday, October 24. The outlook is bleak.

"They will rip him," Sweet predicts. "I've been to many, many road shows, and they will have no mercy."

The company plans to go public on Nov. 4, and hopes to raise $621 million, putting the company's value at about $11.4 billion. Here's a quick timeline of Groupon's IPO history that shows just why investors and analysts are giving Groupon's IPO such a tepid reception. 

June 2: After turning down a $6 billion offer from Google in late 2010, Groupon filed it S-1 form with the SEC. In it, Mason writes "We aggressively invest in growth...We are always reinventing ourselves...We are unusual and we like it that way," adding "Life is too short to be a boring company." Looking back, Scott Sweet says Groupon should have just taken Google's $6 billion. "I bet [Groupon's] VCs want to strangle them for not taking it," Sweet says.

July 27: Groupon's S-1 filing came under scrutiny from the Securities and Exchange commission for an unusual accounting metric called "Adjusted Consolidated Segment Operating Income," which calculates revenue without first debiting expenses like marketing and advertising. "In my humble opinion, they were trying to pull a fast one," says Sweet. The SEC demanded the company revise the bizarre accounting metric, and Henry Blodget, editor of Business Insider, applauded the decision, declaring, "Chalk one up for the good guys in the war against bullshit accounting."

August 25: Potentially violating an SEC-mandated quiet period in which a company must refuse to speak to the press, Andrew Mason sent out a 2,481-word e-mail that quickly circulated in media. Many were quick to criticize Mason for this stunt, and his reputation took yet another blow.

September 6: Amid a volatile stock market and growing scrutiny from the SEC, Groupon pulled its IPO off the shelf. Analysts were quick to zero-in on Mason's behavior as a cause of the sudden cancellation. Jeffrey Sica, president at Sica Wealth Management LLC, told The Wall Street Journal that Mason had better "let [the criticism] quiet down," before going on a road show.

September 25: More red flags. Groupon's chief operating officer Margo Georgiadis abruptly left Groupon, becoming the second COO to leave the company in just six months. "A COO leaving with all those shares? There's no question that this raises questions," PrivCo analyst Sam Hamadeh told USA Today.

October 7: After several revisions, Groupon revised its S-1 yet again. In the most recent prospectus, Groupon clarified its new accounting metric, called "gross billings," which is essentially the total revenue the company collects from consumers before remunerating vendors. The company also included Mason's leaked e-mail from August.

October 24: Groupon will begin meeting with investors to kick off its IPO road show. Though the company hasn't officially declared how much it seeks to raise in an IPO, insiders peg the company's valuation at $10-to-$12 billion. But as recently as June, the valuation was looking flush at a cool $30 billion. And how might you explain Groupon's fall from grace? "There are few people left that are pounding the table saying they must own shares," says Sweet. "Groupon has lost its luster."

Last updated: Oct 24, 2011




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