Groupon IPO: An Internet star falls to Earth
Groupon IPO was poised to raise $25 billion a few months ago. Now, the Groupon IPO is slated for less than half that. Why the change?
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After Groupon filed documents for its IPO in June, the SEC — and the investment community — began asking serious questions about the company.Skip to next paragraph
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The first concern stemmed from how Groupon accounted for its revenue.
Groupon roughly splits the money it collects from customers with merchants. But in the filing, Grouponreported all of its gross billings as revenue. Standard accounting principles dictate that Groupon should have used net revenue — the amount it keeps after paying the merchant.
For example, Groupon reported $1.52 billion in revenue for the first half of 2011. But after the SEC questioned it, Groupon in late September submitted new documents that showed that net revenue in the first half of this year was actually $688 million. Groupon was overstating its revenue by roughly half.
Groupon's growth has no doubt been quantum. Since November, 2008, it has signed up 142.9 million email subscribers and has had more than 30 million customers. But only 20 percent of subscribers have purchased aGroupon. And only 10 percent have purchased more than one.
Groupon also faces concerns about how it has used its money.
On Oct. 7, in its fourth amendment, Groupon disclosed that it had spent half its net revenue — $345.1 million — on marketing costs alone during the first half of this year. Analysts think of those costs as how muchGroupon is paying to acquire subscribers.
Additionally, there are questions about how the company has used investor money. Traditionally, investor money is used to grow a business before it goes public. But according to Groupon's SEC filings, $810 million of the $946 million it raised went to early investors and insiders. That includes $398 million to Groupon's largest investor, shareholder and executive chairman, Eric Lefkofsky.
"Taking this money raises questions about the integrity of the company and enormous questions about the quality of the management team," says Mulpuru. "Groupon's primary problem first and foremost is greed."
Meanwhile, the company's debt has skyrocketed. Groupon's ratio of debt to capital is 102 percent. By comparison, the ratio for social-networking site LinkedIn is about 30 percent and gaming site Zynga's is about 49 percent. "Those companies are all in normal territory," says Ed Ketz, a Penn State accounting professor. "But Groupon's is excessively high."
In Friday's filing, the company laid out third-quarter financial figures that showed it is getting closer to profitability. For the three months ended Sept. 30, Groupon narrowed its net loss of $10.6 million on revenue of $430.2 million in part by lowering marketing spending. That compares with a loss of $49 million on revenue of $81.8 million in the same period last year.
Groupon, which rejected a $6 billion takeover offer from Google Inc. last year, disclosed in the Friday filing that its revenue has grown from $1.2 million in 2009's second quarter to $430.2 million in the third quarter of this year.
The company has its supporters. Groupon has been funded by such venture capital heavyweights as Andreessen Horowitz, firm of Netscape founder Marc Andreessen. Andreessen declined to comment, but in an August essay in the Wall Street Journal, he wrote that companies like Groupon would "eat the retail marketing industry."
"We are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swaths of the economy," he wrote.