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'The Missed Red Flags at Groupon'

Looks like it's sinking fast.

This summer, Lloyd Blankfein, the chief executive of Goldman Sachs, flew to Chicago to personally pitch his firm to underwrite what was supposed to be the hottest initial public offering of the year: Groupon, the fledgling online coupon company that was being valued at around $30 billion.

Mr. Blankfein’s pitch succeeded and Goldman was selected as one of three lead underwriters, including Morgan Stanley and Credit Suisse. As the summer progressed, some insiders whispered that the offering could value the company at even more. For Wall Street, the I.P.O. was the ultimate bragging right.

They probably aren’t bragging anymore.

Groupon’s triple-digit growth has slowed, slicing Groupon’s valuation in half — if not more. Analysts now suggest the valuation will be lucky to be more than $10 billion. A series of accounting and disclosure gaffes have brought the attention of the Securities and Exchange Commission, raising questions about the company’s credibility.

The history of Groupon’s chairman, Eric Lefkofsky, was also unearthed, showing a lawsuit-prone entrepreneur who flipped a dot-com company in 1999 only to have it lead to bankruptcy a year later for the firm he had sold it to. And Groupon’s filing shows that when the company privately raised $950 million in a pre-I.P.O. round in January, it paid out $810 million of that to its investors and employees, a red flag for any investor. (Mr. Lefkofsky and his wife took home about $319 million of the total.)

All of this raises an obvious question: How did so many Wall Street firms desperate to underwrite the Groupon I.P.O. miss these warning signs when pitching such a sky-high valuation? Or did they just turn a blind eye?

“Underwriters are supposed to be gatekeepers, not just a sales and marketing agent,” said Lynn E. Turner, a former chief accountant for the S.E.C. “Underwriters have gotten to the point of being cheerleaders. I question whether they are really fulfilling their obligation to investors.”

A cursory reading of the various versions of Groupon’s prospectus that the banks signed off on, as did the accounting firm Ernst & Young, would give virtually anyone a modicum of pause. And a deep dive into the numbers should have raised alarm bells at the outset about even talking about the possibility of a $30 billion valuation.

Here’s just one data point: Groupon has $225 million in the bank. The company lost $102.7 million in the last quarter on revenue of $878 million. If that were to continue at the same pace, it would need to find a new way to start making money quickly or raise new financing. That is why the I.P.O. could not come soon enough. (Groupon, it should be noted, says it does not intend to use the proceeds of the I.P.O. to finance operations in the next 12 months. But there is always next year.)

In total, as of last quarter, the company had $681 million in current liabilities but only $376 million in assets. Among its liabilities, it owed $392 million to vendors. That is because the company receives money from customers before it has to pay its vendors, called a working capital deficit.

In some cases, a working capital deficit is not a problem. Wal-Mart has a working capital deficit, too. But when there are questions about whether your business can continue to grow at the same rate, a working capital deficit can become a problem because it means you are relying on a steady stream of new revenue to pay off old liabilities.

The company also spent $432 million in the first six months of the year on marketing, an unsustainable model. Add in the fact that Groupon’s revenue slowed in August, up only 13 percent, compared with 96 percent in the first half of the year, according to Yipit Data, and the picture becomes a bit nerve-racking.

Groupon is in a quiet period ahead of its I.P.O., so the company, as well as its underwriters, is unable to comment publically.

But in a memorandum to employees last month, Groupon’s chief executive and founder, Andrew Mason, said he was not worried: “We’re

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by Anonymousreply 9October 18, 2011 6:10 PM

Anyone with a brain knew that Groupon didn't have much a business model, but neither does Google.

by Anonymousreply 1October 18, 2011 3:46 PM

[quote] But in a memorandum to employees last month, Groupon’s chief executive and founder, Andrew Mason, said he was not worried

Why should he be? Thousands upon thousands of other high finance crooks are getting away with this hocus pocus and have been for the past 30 years.

by Anonymousreply 2October 18, 2011 4:24 PM

ITA with R1.

As soon as I read about this hair brained scheme, I knew there was trouble brewing.

So how many times is anyone going to take advantage of half price cha-cha lessons?

by Anonymousreply 3October 18, 2011 4:27 PM

[quote]How did so many Wall Street firms desperate to underwrite the Groupon I.P.O. miss these warning signs when pitching such a sky-high valuation? Or did they just turn a blind eye?

The answer is in the (second) question. After the initial thrill (for those who are thrilled by that sort of thing) of receiving offers for those discounted spa treatments, designer jeans, a restaurant on the other end of town, I expect attention winds down quickly. However steep the discount, if it's not something you want, at a particular time and a particular place, the novelty and "savings" wears thin, no matter how customizable and targeted.

It's a problem with all offers marketed through e-mail and social media, and Groupon seems so random in its offerings that it would have been wise to have unloaded the whole deal at the first big opportunity.

I'm glad Google didn't buy it for untold billions. While Google's business model is an unorthodox one, at least it turns out money and has a central place in things.

by Anonymousreply 4October 18, 2011 4:45 PM

Part of the problem is the hundreds of other copycat companies offering similar deals. You can pick and choose from a greater selection of services and restaurants. The market is over-saturated now.

by Anonymousreply 5October 18, 2011 4:58 PM

In the first year I bought a couple good offers. I just used up my last one about six days before it was to expire. Now I just get the occasional laser hair removal or teeth whitening service offers. I'm ready to unsubscribe from them.

by Anonymousreply 6October 18, 2011 4:59 PM

There is no comparison between Groupon and Google.

by Anonymousreply 7October 18, 2011 5:04 PM

Groupon CEO's and higher-ups also don't care because even if it explodes and folds, they will make sure they get all their money. All other CEO's fuck up and don't lose money, so why should they?

by Anonymousreply 8October 18, 2011 6:05 PM

I signed up a year ago or so but never got anything good that I would buy. I get better coupons in the val-pack that comes in the mail every once in a while.

by Anonymousreply 9October 18, 2011 6:10 PM
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