11.04.11

Groupon's No Bargain

The Internet coupon guys are going public but would-be investors should stay away, because behind the scenes the company is a mess and the stock is risky, says Dan Lyons.

Groupon, the once-white-hot Internet coupon company, will start selling shares to the public Friday, and the stock will have one big thing going for it, which is that millions of ordinary people have purchased a Groupon offer and know (or think they know) what the company is all about. Some of those bargain-hunters will hear about the IPO and wonder whether shares in Groupon represent as good a deal as the half-price spa visits and yoga classes on which Groupon has built its business.



The short answer is no. The long answer is, Really, seriously, please do not buy this stock, no matter what your friend tells you, because Groupon might look like a lovely place from the outside, with its kooky, clever email offers and its attractive website, but behind the scenes this company is a mess, and the stock carries loads of hidden risks.



Henry Blodget, the former Wall Street analyst turned blogger, says he wouldn’t touch the Groupon IPO with a 50-foot pole.



Noisy CNBC stock tout Jim Cramer calls the Groupon IPO “the most hyped, most artificial deal I’ve ever seen since the dotcom era began.” He says if you can get the stock at the IPO price, buy it and then flip it right away, because “this is not something you want to own, and definitely not something you want to buy in the after market.”



There’s a long list of reasons to steer clear of Groupon, but the single biggest reason is that Groupon doesn’t really exist to sell coupons, or to help small merchants find customers, or to “change the world,” as tech companies like to say.

The real reason Groupon exists is to line the pockets of a few early investors who have already been milking this company for all it is worth, selling off shares and even paying themselves handsome dividends even though the company has never generated a dime of profit.


Over the course of its history, Groupon has raised $1.1 billion in venture funding, but has paid out $942 million of that to insiders. Earlier this year, when Groupon raised $946 million in a venture round, only $136 million went to the company itself, while a staggering $810 million was used to buy shares from insiders.



In April 2010, Groupon raised $130 million in venture funding, only $10 million went to the company, and $120 million went to insiders. 



Big chunks of that money have gone to LLCs run by two early investors—Eric Lefkofsky and Brad Keywell—and their wives. 



In June, Lefkofsky was the subject of a less-than-flattering profile in Fortune describing his track record with other companies, marked by “rapid revenue growth accompanied by big losses, a penchant to sell stock early on, and lawsuits filed by investors, lenders or customers who feel they have been wronged.

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So far, Lefkofsky has pulled nearly $400 million out of Groupon. Keywell has pulled out $156 million. Mason, the CEO, has taken $10 million.



In other words, these guys were getting rich on Groupon even as the company itself was losing money and running low on cash, according to a report by Blodget on his site, Business Insider, in August. Blodget reported that Groupon had “negative working capital,” meaning it owed more in bills than it had in cash.



As Blodget pointed out, Groupon could pull this off because it collects money from customers and then has 60 days to pay merchants their share. As long as Groupon keeps growing, it can generate enough from new Groupon offers to pay what it owes on old Groupon offers. (In a typical Groupon deal, a spa might offer a $100 service for $50. Groupon collects the $50 from the customer and two months later pays half of that money to the spa.) But if Groupon’s growth slows, it could find itself in a pinch, Blodget reported.



Earlier this year Groupon was aiming for a valuation of $30 billion. Now they’re talking about a valuation that’s a bit over $10 billion. The lowered expectations are due in part to the sagging economy. But equally responsible are some of the things Groupon revealed in its initial S-1 filing with the SEC.



One item that raised eyebrows was a new accounting metric that Groupon apparently invented, called ACSOI, which stood for Adjusted Consolidated Segment Operating Income, and whose purpose seemed to be to create the impression that Groupon was profitable even though it was not. The ACSOI number was a way of showing what Groupon’s results would be if it were to stop spending huge money on marketing expenses to attract new customers.



Stick to the half-price sky-diving lessons and yoga classes, and take a pass on the Groupon stock.

Groupon at first defended the metric saying that it gave a realistic picture of future operations, because over time the company would not need to spend so much money to attract new customers. Supposedly, regulators were less than impressed, and soon Groupon amended its S-1 filing and removed the ACSOI metrics. 



In the most recent quarter, which ended in September, Groupon did in fact slash spending on advertising and customer acquisition, and lo and behold, it managed to almost break even. Some viewed this as evidence that Groupon will indeed one day be a huge, profitable business. Others pointed out that when Groupon cut back on its advertising spending, its growth rate also slowed down. Whether the company can keep growing and become profitable remains to be seen.



New rivals are entering the space that Groupon occupies, including giants like Google and Amazon, which will put more pressure on Groupon’s growth. Meanwhile, Groupon is also experiencing difficulties as it expands into other countries. Its joint venture in China has been struggling for months, and in the most recent quarter lost $46.4 million on revenue of only $2.1 million.



A word of advice to bargain hunters: Stick to the half-price sky-diving lessons and yoga classes, and take a pass on the Groupon stock.