Groupon is Radioactive

There is just no other word to describe this mess of a company.  I have already discussed Groupon at some length in the context of talking about picking co-founders and co-investors carefully, but in the wake of Groupon’s crippled IPO, Michelle Conlin , business writer for the AP, just published an excellent analysis of where the company sits at the moment entitled “Groupon’s fall to earth swifter than its fast rise“.

Michelle Conlin on Groupon’s current plight:

“…the startup that pioneered online daily deals for coupons is an example of how fast an Internet darling can fall…”

On their IPO:

“…Groupon is discounting its expectations for the IPO that in June was valued as high as $25 billion. In a regulatory filing Friday, the company said that it expects a valuation that is less than half that at between $10.1 billion and $11.4 billion…”

On the fundamentals of their business:

“…Now Groupon faces concerns about the viability of its daily deals business model. The novelty of online coupons is wearing off. Some merchants are complaining that they are losing money – and customers- on the deals. And competitors are swarming the marketplace… consumers are questioning the quality of Groupon’s offerings…  Adding to growing customer discontent, Groupon, which was initially seen by small mom-and-pop shops as a way to drum up new business, was losing favor with some of them. Merchants began to do the cruel math on the daily deals… Groupon also faces concerns about how it has used its money…  Groupon disclosed that it had spent half its net revenue – $345.1 million – on marketing costs alone during the first half of this year…”

“Groupon is a disaster,” says Sucharita Mulpuru, a Forrester Research analyst. “It’s a shill that’s going to be exposed pretty soon… It’s like watching a Ben Stiller movie and waiting for the next painful moment…”

On the darker view of things that the company just cannot seem to shake:

“…critics say the issues Groupon is facing are symptomatic of something more troubling: questionable accounting, an overvalued business model and an industry that is turning into the digital equivalent of junk mail…”

On its seemingly perpetual management turmoil:

“Groupon also has faced trouble behind its own doors… After only two months, its public relations chief quit in August. Two seasoned executives hired as COOs also left. The latest, former Google sales vice president Margo Georgiadis, resigned after five months to return to Google. Her departure coincided with Groupon’s announcement that it was restating its revenue by around half…”

On their unusual accounting practices:

After Groupon filed documents for its IPO in June, the SEC – and the investment community – began asking serious questions about the company.  The first concern stemmed from how Groupon accounted for its revenue…  Groupon reported all of its gross billings as revenue. Standard accounting principles dictate that Groupon should have used net revenue – the amount it keeps after paying the merchant… But after the SEC questioned it, Groupon in late September submitted new documents that showed that… Groupon was overstating its revenue by roughly half…”

On its dodgy, greedy founders, including our old friend Eric Lefkofsky:

“Additionally, there are questions about how the company has used investor money. Traditionally, investor money is used to grow a business before it goes public. But according to Groupon’s SEC filings, $810 million of the $946 million it raised went to early investors and insiders. That includes $398 million to Groupon’s largest investor, shareholder and executive chairman, Eric Lefkofsky.”

“Taking this money raises questions about the integrity of the company and enormous questions about the quality of the management team,” says Mulpuru. “Groupon’s primary problem first and foremost is greed.”

On its mushrooming debt:

Meanwhile, the company’s debt has skyrocketed. Groupon’s ratio of debt to capital is 102 percent. By comparison, the ratio for social-networking site LinkedIn is about 30 percent and gaming site Zynga’s is about 49 percent. “Those companies are all in normal territory,” says Ed Ketz, a Penn State accounting professor. “But Groupon’s is excessively high.”

My Take:

This is scary stuff.  If there was a way to short a pre-IPO company, I’d be sorely tempted.  I just hope something snaps before this IPO happens and this mess isn’t foisted on the investing public.  It will only enrich some pretty sketchy characters at the expense of further diminishing the credibility of the VCs and investment banks, neither of which have yet lived down the flood of crappy IPOs they unleashed and hyped to death during the bubble.  We need a healthy IPO market to fund innovation, create jobs and make our country competitive.  Having VCs and banks shamelessly hype deals like this is not the way to nurse the IPO market back to health.  Here’s hoping something derails this before the train wreck.

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