Groupon (GRPN) - profile

A controversial and unprofitable daily-deals and coupon website. Started trading on the NASDAQ on November 4, 2011 under the symbol GRPN.

• Groupon raised $700 million after increasing the size of its initial public offering, becoming the largest IPO by an Internet company since Google Inc raised $1.7 billion in 2004.
• The company is now worth about $80 billion.
• The underwriters were Morgan Stanley, Goldman Sachs and Credit Suisse
• Filed for a $750 million IPO on June 1, 2011, originally planed to debut mid to late September.
• Andrew Mason, the chief executive and founder of Groupon, is worth $2 billion less than Eric Lefkofsky (Groupon's largest shareholder and chairman), the man who financed Groupon’s start. Lefkofsky  has a 22% stake in the company.  The other co-founders include Andrew Mason (8% stake), and Bradley Keywell (7% stake),
• Groupon has 10,000 employees and has offered over 1,000 daily deals to 150 million subscribers across 46 countries, and has sold over 70 million Groupons.
• Groupon deals can be irresistible to customers. The merchant typically agrees to discount a product or service by 50 to 90 percent. Groupon then sells the coupons via its e-mail distribution list. Usually a minimum number of people have to buy the offer before the deal “tips” and becomes redeemable. Groupon and the merchant then split the revenue from the deal 50–50. They both keep the money even if the customer never redeems the voucher. An estimated 20 percent of Groupons don’t get used, which amounts to free revenue for local merchants.

• Headquarters in Chicago; company started in 2008; the fastest growing company ever
• Sold 30 million shares (or about 5%) at $16 to $18 apiece, out of the 630.4 million shares that will be outstanding after the offering. At the midpoint of the price range, Groupon would be valued at $10.8 billion.
• The low-float approach, dubbed "slim to win," involves selling a sliver of a company's outstanding shares in an effort to create an artificial scarcity once the shares begin trading. It was most recently employed by LinkedIn (ticker: LNKD) and Zillow (Z), whose shares rose sharply immediately after their IPOs, and which still trade comfortably above their IPO prices.
• Price range of between $16 and $18 per share would value the daily deals company at $10.1 billion to $11.4 billion. Early buzz had swirled around a valuation as high as $30 billion
• Plans to raise between $480 million and $540 million, a more modest goal than its original plan of $750 million
• Founded in 2008 by Andrew Mason, Eric Lefkofsky and Brad Keywell
• Sales in 2010 surged to $312.9 million from $14.5 million the previous year, a growth rate so fast that Google offered to buy the company for $6 billion last year. Groupon rejected the deal, choosing instead to raise $950 million in private capital and stay independent while pushing toward an IPO.
• That strategy came under fire in June, when Groupon filed its prospectus, showing the company had lost $540.2 million in three years and that in the first quarter alone had spent $179.9 million to bring in subscribers.

Andrew Mason, 30-year old Groupon's CEO, once spread a rumor in his office that he owned 20 cats

Cons:

• Unprofitable: Groupon lost $62.3 million in the second quarter, an improvement from the first quarter when it lost $98.3 million.
• Zero barriers to entry; hundreds of competitors, including Living Social, Google (Google Offers), Amazon, AT&T, and The New York Times
• Unique choice of accounting (required a new S-1)
• Business in North American is slowing: revenue per subscriber and revenue per merchant are declining in North America. 
• A $10 billion market value is a lot for a company with no profits and an unproven business model.
• As of June 30, Groupon had $225 million in cash on hand, according to an amended S-1 the daily-deals website filed with the Securities and Exchange Commission. The problem: The company still owed $392 million to merchants for Groupons that had already been sold and used up by its customers.
• The company had $243.9 million in cash at the end of September and still owed merchants $465.6 million. The 8.4 percent increase in cash from the prior period was outstripped by the rise in marketing costs, which jumped 37 percent to $234.4 million.
• Groupon is more of an advertising company than an Internet company. It has upward of 10,000 employees—about five times that of Facebook—because it needs: an army of salespeople to call on local businesses; customer-service reps; technology staff; plus writers to craft hundreds of catchy pitches a day for the deals e-mailed to most of its 142 million subscribers.
• Groupon faces escalating competition from LivingSocial and Google Inc. (GOOG), which are giving more favorable terms to merchants. That’s led Groupon to accept lower margins to avoid losing business. The amount of billings the company booked as revenue shrank to 37 percent in the third quarter from 42 percent in the prior period and 44 percent in the first quarter. Groupon attributes the lower margins to getting into new products, like travel and event tickets. 
• Groupon’s margins are already being pressured as businesses become savvier at the negotiating table. Instead of making a solid 50 percent on the deals, many of Groupon’s salespeople are being told to accept less favorable margins, in the 35-to-45-percent range. National merchants are now able to negotiate deals in which Groupon’s share is 5 to 25 percent. 

Pros:

• Few companies have grown as rapidly as Groupon. Founded in 2008, the company had 142 million subscribers globally at the end of the third quarter, up from 21 million a year earlier. 
• Nine-month revenues of $1.1 billion were more than seven times the $140 million in the same period of 2010. 
• Much of Groupon's growth this year has come abroad, where it is aggressively expanding.Groupon is growing fast, making it attractive to investors facing a slowdown in economic growth
• In 2010, it featured 66,289 merchants, and in the first 3 months of 2011, it featured 56,781 merchants.
• Its 2010 revenue was $713.4 million compared to $30.5 million in 2009. During the first quarter of 2011, it generated revenue of $644.7 million.

Revenue rose to $878 million in the second quarter compared with $644.7 million in the first quarter and rose more than 900 percent from $87.3 million in the second quarter of 2010, the company reported in the filing.

The numbers show Groupon's growth slowed from the first quarter. Revenue was up 36 percent in the second quarter, below growth of 63 percent in the first quarter.

The number of Groupon subscribers jumped to more than 115 million at the end of the second quarter. But revenue per subscriber fell 12 percent to $8.57 in North America, according to David Sinsky of Yipit, which tracks the daily deal industry.

Forty-six percent of revenue was generated from North America in the first quarter 2011, and 54% was generated from Europe. In May 2010, Groupon acquired CityDeal, which added 1.9 million subscribers as of the date of the acquisition in several major European markets, including London, Berlin and Paris, and ended the year with operations in 38 countries.

Groupon has offered deals involving over 140 different types of businesses, services and activities that fall into six broad categories; the following shows the percentage of deals offered worldwide across those categories during the first quarter of 2011: Health & Beauty: 31%; Food & Drink: 23%; Activities: 15%; Events: 11%; Services: 11%; Retail: 9%.

More about Mason and Groupon

• In 1999, Mason moved to Chicago’s North Shore to attend Northwestern University, where he studied music. (Mason, a pianist from a young age, says that he wanted to pursue his dream of becoming a rock star.)
• Mason graduated from college in 2003 without a clear plan. He took a job as a software developer at InnerWorkings, where he met Eric Lefkofsky, a prominent Chicago investor and businessman. 
• April of 2010: Groupon received a $135 million cash infusion from investors, including Russian Internet billionaire Yuri Milner and several prominent Silicon Valley firms. 
• Mason and his team began snapping up Groupon’s copycat competitors like candy. In June they entered Chile and Brazil. In August they expanded to Russia and Japan. Then Singapore, South Africa, India, the United Arab Emirates, and China. Today, Groupon is in 46 countries and more than 500 cities.
• In Australia a daily-deals company called Scoopon filed for the Groupon trademark and also purchased the Australian Groupon domain name. Mason offered the owner of the company nearly $300,000 for the site and the trademark. Scoopon balked, and Groupon sued. With no other choice, and not wanting to lose the Australia market altogether, Mason decided to launch in Australia under a different name entirely, Stardeals—while Groupon.com.au remained tied up and inactive under unrelated ownership. (The lawsuit is still pending.) Similar scenarios began playing out all over the map.
• Groupon is still working to secure the Chinese version of Groupon.com, currently operating in China under the name GaoPeng. A retired government worker in Bangalore bought the Indian Groupon Web domain and is running a business that looks nearly identical to the U.S. Groupon. In Ireland, Groupon successfully brought charges before the World Intellectual Property Organization to force a subsidiary of the Irish Times Group to give up the Irish version of the Groupon domain name.
• Domain squatting is a common pitfall of the Internet world, but it can be especially problematic with a digital business that is easily replicable.
• In November of 2010, Google made a $6 billion acquisition offer for Groupon.

Low-float IPOs

Selling a Sliver

In their IPOs, many Internet companies offer only a fraction of their equity to outside investors. Such a tactic helps support stock prices by keeping supply low. While Groupon's revenues have risen sharply, profits are elusive.

	Groupon	HomeAway	LinkedIn	Pandora Media	Zillow
	GRPN	AWAY	LNKD	P	Z
Recent Price*	$17.00	37.32	87.23	14.82	30.77
Change Since IPO	NM	38.2%	93.8	-7.4	53.8
Shares Offered In IPO (mil)	30	8.0	7.8	14.7	3.5
% of Shares Outstanding	4.7%	10.0	8.3	9.2	12.9
Market Value (bil)	$10.8	3.0	8.4	2.4	0.9
2011E Revenue (mil)	$1,900	227	506	272	62
2011E EPS	-$0.61	0.46	0.02	-0.06	0.13
*At midpoint of pricing range. E=Estimate.
Sources: Thomson Reuters; Susquehanna Financial Group; Morningstar

Zynga Is Said to Favor Following LinkedIn With a ‘Low-Float’ IPO Strategy

Zynga Inc. plans to sell a small number of shares in its initial public offering, adopting a strategy used by LinkedIn Corp. to maintain control of the company while raising money to expand, according to a person with direct knowledge of the matter.

Zynga may make less than 10 percent of its shares available to the public in its IPO, said the person, who declined to be named because the plans are private. That compares with a 24 percent average among U.S. technology IPOs in the past year, according to Bloomberg data.

By selling little stock in the IPO, companies protect the value of existing investors’ stakes. A jump in the stock price would let them raise cash at a higher value months later. LinkedIn is up 73 percent since its IPO, and Zynga Chief Executive Officer Mark Pincus is likely betting on a similar rise, yet there’s no guarantee the stocks will stay high, said David Menlow, president of IPOfinancial.com, a research firm.

“Companies in this space realize there’s a feeding frenzy afoot,” said Menlow, whose firm is based in Millburn, New Jersey. “The risk is that as a CEO you believe you are better than you actually are. The reality may be something very different.”

Zynga and LinkedIn have another connection: LinkedIn Chairman and co-founder Reid Hoffman is also on the board of Zynga and was an early investor.

Goldman Sachs

Zynga, the top developer of games for Facebook Inc.’s site, has yet to submit an IPO filing, and its plans may change. The San Francisco company is in talks to have Goldman Sachs Group Inc. lead the stock sale by the end of the month, a person familiar with the matter said last week. Dani Dudeck, a Zynga spokeswoman, declined to comment on the IPO or the number of shares that will be sold.

LinkedIn, the largest professional-networking site, held its IPO on May 18, becoming the first social-media company to go public. Other Internet companies are now preparing to follow, with online-radio service Pandora Media Inc. expected to start trading next week. LinkedIn sold 8.3 percent of its stock in the offering, while Pandora is selling 8.6 percent.

Groupon Inc., the leading online provider of daily deals, filed for its IPO last week. In a memo to employees, Groupon CEO Andrew Mason said the Chicago-based business would “make a small piece of our company available.”

OpenTable’s Strategy

The approach, known as a low-float IPO, also was used by OpenTable Inc. (OPEN) in its 2009 offering. The restaurant-reservation service sold about 15 percent of its shares initially. After a 40 percent price jump, it offered more than twice that number four months later. The stock is now up more than fourfold since the IPO, bolstering gains for early investors and employees.

The strategy was more about preventing the value of shares from getting watered down, said Bill Gurley, a board member at San Francisco-based OpenTable.

“The goal wasn’t low float, it was low dilution,” said Gurley, who also serves as a partner at Benchmark Capital in Menlo Park, California, an OpenTable backer. “They just come in the same package.”

Companies using this tactic often see their stocks rise, in part because of the small supply of available shares. That helps them build excitement around their brands, said Lise Buyer, founder of IPO advisory firm Class V Group. Often, the companies will use the initial sale to gauge market demand for a bigger offering later, she said.

Virtual Goods

Zynga makes its money from selling virtual items within games -- for instance, a townhouse in “CityVille.” The worldwide virtual-goods market is expected to more than double to $20.3 billion in 2014, from $9.28 billion last year, according to ThinkEquity LLC, a San Francisco-based research firm. Still, Zynga will be the first of its kind on the U.S. public markets.

“If you’re in a new business model that nobody understands, this is a way to test the market,” said Buyer, who helped run Google Inc. (GOOG)’s IPO in 2004. “No one knows how to value these companies, so why not put a little bit out there and then do a bigger one later once you’ve seen what the market will pay?”

It doesn’t always work. MakeMyTrip Ltd. (MMYT), an online travel site based in India, sold 5 million shares, or 15 percent of the company, in August. The stock rose 89 percent on the first day of trading. In March, it filed to sell an additional 6 million shares, only to reduce it to 5.24 million last month due to lack of demand. The shares then fell 5.6 percent.

For Zynga’s Pincus, selling less of the company may be more about maintaining control than boosting the stock price. Even after raising hundreds of millions of dollars in private capital, Pincus still owns about 30 percent of the company he founded in 2007, according to a person familiar with the matter. He’s talked openly about it in the past.

“I would fight to the end for control because if you don’t have control of your company then you are an employee,” Pincus said in 2009 to students at a Stanford University forum. “If you’re going to give up control, go home.”