Groupon discounts dual-class share structures

November 30, 2012

By Robert Cyran

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

Groupon’s melodrama is discounting dual-class share structures. Chief Executive Andrew Mason and Chairman Eric Lefkofsky appear locked in a dysfunctional battle over how to run the flailing company. The board is keeping Mason at the helm, but the fighting probably isn’t over. Super-voting shares like the ones both men own are meant to give founders flexibility. But Groupon is a reminder of just how dangerous the arrangement can be.

Any company would be in disarray with this kind of performance. Groupon shares are down about 80 percent since they debuted on the market a year ago. Rivals are struggling, too. Last month, for example, Amazon wrote down nearly its entire investment in LivingSocial. Groupon’s coupon revenue is falling sharply and the company is devoting more space in daily emails to offering goods directly. The strategy looks shaky: margins on good sales are about a third of coupons.

It’s not obvious leadership is so much the problem at Groupon as the business model. Even so, the chairman’s camp has raised the possibility of getting rid of Mason. Instead of helping steer the ship in a better direction, it could make it sink faster. Mason will now spend months addressing questions about his job security and whether the strategy will suddenly change.

There isn’t exactly great confidence in the other co-founder either. Lefkofsky has had several contentious business failures in the past, sold equity before the IPO and made statements about Groupon’s eventual profitability that the company had to publicly disavow. Ousting the chairman might be a more logical first step, but isn’t a realistic option.

Lefkofsky and his longtime ally Bradley Keywell have an iron grip on Groupon. With Mason, the trio has about 35 percent of the votes with just 1 percent of the economic interest. All told, they control the company. In theory, the super-voting stock pervasive among technology and media companies is supposed to enable visionaries to pursue their long-term visions without the short-term pressures often imposed by other investors. In practice, though, it can leave minority shareholders stuck with little recourse. Groupon owners are learning the lesson the hard way.

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