Thursday, September 29, 2011

Groupon Walked Away From $6 billion Last Year, and Now a Lot More May Be Walking Away from Groupon

Greed, Like Pride Sometimes Goeth Before a Falleth

When Google offered to buy Groupon, the Company that pioneered on-line coupon sales for $6 billion the immediate reaction by savvy, knowledgeable financial types was “take the check, get to the bank before it closes and make sure it clears”.  This was also the reaction of non-financial experts, in fact it was the reaction by almost everyone who had a pulse. 


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Groupon CEO Doogie Howser  Andrew Mason

The only people who did not have this reaction were Groupon shareholders.  They envisioned a public offering that would value the company at $20 billion.  An so they filed to go public this summer, expecting to sell shares at that valuation and make themselves incredibly rich.  The forgot several things however,.

The first thing they forgot was that Google was offering hard currency, whereas after a public offering all they would hold is public shares that had a theoretical value, but not a realizable one, at least not in the short run.  This was because even after the stock went public the owners could not dump all their share on the market without depressing the value of the stock. In fact there was no guarantee that a public offering could be successfully done at all.

More importantly, the second thing they forgot was that Groupon did not have a monopoly on its business model.  There are no real barriers to entry.  There is no real way to protect the company from competition which duplicates the Groupon process exactly.  And so the public offering, as expected, is running into difficulty.

Groupon, which filed to go public in June, has sought a valuation of $20 billion in one of the most highly anticipated stock offerings among a new crop of Web companies. But questions have emerged since then about its prospects amid an influx of competition and rising costs to acquire customers that are cutting into its profits.

The offering has also faced intense scrutiny from the Securities and Exchange Commission, which led Groupon on Friday to amend its offering filing to reduce reported revenue for 2010 to $312.9 million from $713.4 million. The SEC required the company to include only what it keeps from daily deal offers, excluding the amount it shares with merchants.

Recent experience with new IPO stocks has not been all that good.

Some of the tech stocks that soared after their IPOs earlier this year have tumbled lately. Business-networking service LinkedIn Corp., which went public in May, is down 31% from its peak in July. Online music provider Pandora Media, which went public in June, is off 46% from its peak. And online realestate data provider Zillow Inc. is off 28%.

Now this is not to say that Groupon will not ultimately be a great investment, many companies were pronounced overvalued failures before  they were big successes, Amazon being the most famous.  Still, that $6 billion in good old American dollars probably looks a lot better today, and if Groupon shareholders were to come across a time machine and be able to go back to the Google offer, well let’s just say the outcome might have been a little different.

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