Groupon’s gaffes give fair warning to investors

August 29, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Groupon’s gaffes have given fair warning to investors. The run-up to the Internet coupon company’s initial public offering has been characterized by a series of rosy promises from executives that went unfulfilled. This bodes poorly for the company’s governance, and perhaps its financial prospects, as a full-fledged public company.

The Chicago-based web outfit lost $420 million last year and $220 million in the first half of this year despite earlier claims it was in the black. Since it’s relatively easy for rivals to set up competing services, buying stock in Groupon is placing a bet upon management. The firm’s latest foot-in-mouth episode — which came directly from chief executive and founder Andrew Mason — makes this a risky wager.

In a memo to staff last week, Mason lashed out at critics, calling rumors that the firm is running out of cash “insane” because companies like Wal-Mart often have payables in excess of cash on hand. Setting aside the propriety of making such claims while under Securities and Exchange Commission rules ahead of an IPO, this was an odd analogy. Wal-Mart had $25.5 billion of profit last year.

Mason also defended the use of a controversial accounting formula that leaves out the cost of acquiring subscribers, equity compensation, interest costs, and taxes. Given the SEC itself had question this metric’s suitability for investors, resulting in its deletion from Groupon’s IPO prospectus, contrition would surely have been the right response.

Overall, the memo reads like stock promotion that skirts laws designed to prevent executives from puffing up their companies before going public. Groupon already publicly disavowed comments by its chairman that the firm would become “wildly profitable.” There is no proof Mason’s memo was leaked intentionally. It may even be legal – normal business communications to employees are exempt.

But the memo is now part of the public record. Groupon executives may have seen it as a clever way to get their views across without violating securities rules. But investors weighing up the firm’s prospects should see it as a clear warning label.

Comments

this groupon will be sold to google for 3 billion dollars in a year… 220M loss for six months is excessive…

Posted by Ocala123456789 | Report as abusive
 

I doubt google will bother.

It makes more sense for them to buy some up and comer with better tech, if at all. The thought for google would be to buy someone who did good customer relations. While the consumers are generally OK with the value, the “partners” who supply everything are NOT happy and few return.

I thought google’s offer before was insane and it looks like I’m being proven correct. The business model is not
sustainable and feels “evil”.

Groupon has exactly one asset that I know about, their name. I’m betting that when they go belly up google will be able to pick it up for a song.

Posted by richard233 | Report as abusive
 

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