initial public offerings (IPOs) trading on American exchanges

Saturday, November 3, 2012

What we've learned a year after Groupon's IPO


A year ago this weekend, Groupon went public.

  • It priced at $20 a share, opened at $28, and then peaked around $30.
  • Since then, it has done nothing but collapse. This week, Groupon’s stock crashed through $4 a share for the first time, setting a new all-time low.
  • The company is now valued at about $2.5 billion.
  • That’s one-tenth the value that some investment bankers told Groupon it was worth in the lead-up to the IPO.
  • It’s down 80% from the IPO price and 85% from the first day’s opening price.




By Joseph B. Cahill

Can you believe it only has been a year since Groupon Inc.'s IPO? Seems more like 10, given how thoroughly the company has transformed from startup superstar to Wall Street has-been.

As Groupon's shares sank as much as 79 percent from the IPO price of $20—it closed at $4.47 today—expectations surrounding the daily-deal company collapsed, too. With the Nov. 4 anniversary of Groupon's IPO approaching, it's time to examine the lessons it holds for all those who expected things to be so much better for the Chicago company.

IPO investors: Be careful what you wish for. Many of you begged your brokers for a piece of the hottest IPO of the year. Instead of badgering your broker, you should have pored over Groupon's prospectus, which contained plenty of red flags that might have dampened your enthusiasm—and saved you money.

Groupon employees: The fun stops when trading starts. After a company goes public, it starts to regard employees not so much as assets to be nurtured as costs to be curtailed. Pressure to meet quarterly earnings expectations leads to many not-fun changes, like tougher performance standards, stingier compensation policies and layoffs when profits start to sag.

Andrew Mason: Shtick isn't a management style. The Groupon CEO's unconventional antics helped fuel the perception that he had discovered a better way to build a business. But Groupon's slowing growth and poor profitability since the IPO shattered that illusion, replacing it with doubts about Mr. Mason's maturity and ability to manage a business with 12,000 employees in 48 countries. Recent attempts to look more serious — like donning horn-rimmed glasses — won't dispel those doubts. Only a solid run of revenue growth and rising profits will convince Wall Street that Mr. Mason is a bankable chief executive.

Eric Lefkofsky: Talking up your company while the SEC is reviewing its registration statement doesn't only anger the regulators. The Groupon chairman and co-founder's public assurance that the company would be “wildly profitable” raised expectations Groupon couldn't possibly meet, damaging its credibility in the stock market. Similarly, the creative accounting metrics Groupon peddled only highlighted its lack of basic profits.
Venture capitalists: Do your due diligence. The rush by supposedly sophisticated VC firms to shower money on Groupon shows how so-called smart money can succumb to herd mentality. All the questions about Groupon's accounting, growth rate and profitability that came up after the IPO are the kinds of issues these firms should have unearthed upfront. Instead, some leapt aboard as Groupon taxied down the IPO runway, pumping in $950 million without asking any questions — most of which went into the pockets of Groupon co-founders Messrs. Lefkofsky and Mason, Brad Keywell and other insiders.

Chicago and the local tech community: It's a bad idea to link yourselves too closely with any single company. Mayoral photo ops at Groupon's Near North Side headquarters, along with widespread cheerleading by local officials and business leaders, helped make Groupon the avatar of Chicago's tech scene. That was great when the company's rise seemed to signal Chicago's arrival as a technology hotbed. But its fall from grace revives old questions about the city's ability to produce viable tech firms.

Just about everybody: Groupon's stunning reversal proves that your mother was right when she told you anything that seems too good to be true probably is. Its rise from nothing to the cover of Forbes in less than two years should have generated more skepticism. But the cheering drowned out the few killjoy questions about revenue and profit.

Groupon eventually may build a profitable business that grows fast enough to justify investing in it. But it's clearly not the company so many thought it was a year ago.

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