Investor frenzy inflating the second dot.com bubble seems to be falling away with the much-vaunted public floatation of Groupon, the coupon company, suddenly being put on indefinite hold. The balloon is beginning to deflate and now the question is whether it will collapse with a feeble "pffutt" or the noisily flatulent explosion of a whoopee cushion placed under a sumo wrestler. By Martyn Warwick.
Groupon, the 'deal-of-the-day' website that requires interest groups of varying sizes to be formed to take advantage of discounted offers available only via the Internet, was founded in November 2008 and grew very quickly to amass millions of users around the world.
In light of the successful recent public floatations of the likes of Linkedin, expectations were that Groupon's IPO would value the company at some US$30 billion. The investment community, in another example of the irrational exuberance that caused the first dot.com bubble to implode, saw dollar signs everywhere as early interest in the company was evinced by companies such as Google.
But, even as Groupon's quarterly profits showed remarkable growth, retailers and industry analysts began to have doubts about the company's ability to control its huge marketing costs and maintain momentum in the medium- and long-term as leaner, meaner rivals begin to emerge around the globe and the novelty value (and sheer hard work) of forming interest groups to take advantage of coupon discount offers begins to wane.
With much of the world still mired in recession and markets in constant turmoil, to go public now is more of a gamble than ever and while Groupon is not the only web-based enterprise to decide to 'postpone' the event, it is the poster boy for the second generation of dot.com IPOs.
To make matters worse, Groupon has run foul of the US Securities and Exchange Commission after the company's CEO, 29 year-old Andrew Mason, wrote a staff email that been described by a Washington Post columnist as "childish". In it, Mason puffed up Groupon's performance in comparison to Amazon, Google and others, promoting its shares whist the company was in the middle of its mandated pre-float 'quiet period'.
The SEC was not amused, concluding that the email, which was mysteriously leaked to the public, was written at a time when the IPO prospectus had been filed and would-be investors should be left to their own devices and decisions. Some industry analysts in the US say the email shows that Andrew Mason is either naive or stupid.
Groupon's senior executives were about to set off on a roadshow but that juggernaut is now stuck in the garage with its wheels off and the company says it is delaying the IPO "due to market volatility? History is littered with the hulks of overblown companies that did the same and then found there was no way back into the minds and wallets of investors.
The big question is, will the non-floatation of Groupon delay the proposed IPOs of Zynga, the online gaming company, LivingSocial, Groupon's biggest rival, and perhaps even that of Facebook?
At the very least, it is expected that Groupon will have to re-file its IPO prospectus in light of Andrew Mason's ill-advised email - a costly and lengthy process.
The SEC already had the company under the microscope after it attempted to introduce a questionable and controversial creative accounting method called “adjusted consolidated segment operating income,” or ACSOI. The device would have made Groupon look extra profitable by subtracting the price of acquiring customers from marketing costs. The regulator took grave exception to the ploy and Groupon was forced quickly to drop the idea.
There is neither the time nor the space here to replicate Andrew Mason's silly email in full - and it's available on the web anyway. I have read it all though and to me it comes across as schemingly adolescent rather than innocently childish. Here are a few nuggets:
1) "Dear Groupon,
This weekend, I did a Google News search on our company - my first in awhile. The first story that popped up was called The Fall of Groupon: Is the Daily Deals Site Running Out of Cash? I laughed when I read the headline (in the car by myself, weirdly). First - with this article, the degree to which we’re getting the shit kicked out of us in the press had finally crossed the threshold from “annoying” to “hilarious.” Second, I was struck by the irony - I had just finished a board meeting last Wednesday saying this to myself: I’ve never been more confident and excited about the future of our business."
This is hubris writ large and, incidentally, how come the CEO was reading the results of Google searches whilst driving a car?
2) "The reason everyone in the world seems to hate ACSOI is that it makes us look magically profitable by subtracting a bunch of our customer acquisition marketing costs from our expenses. The reason we didn’t realize everyone in the world would hate ACSOI (no, it’s not the same reason we didn’t realize everyone in the world would hate our Superbowl ad), is that we think it actually does a pretty good job at describing our marketing expenses in a steady state – we just didn’t realize there would be so many skeptics."
Such as the US financial regulator.
3) "There’s no question in my mind that we’re building a business that will be around for the long haul."
There is in others.
4) "I wrote this email because when I read some of the press this weekend, I realized a rational person could read this stuff and wrongly conclude that we’re in trouble. The irony is hopefully clear: We’ve never been stronger."
5) “If there’s a silver lining, it’s that we’re almost on the other side, and the negativity leaves us well-positioned to exceed expectations with an IPO baby that, having seen the ultrasound, I can promise you is not one of those uglies.”
Oh, please? Pass me the barf bag.
Last year, Google offered to buy Groupon for $6 billion but was rejected. Mr. Mason might yet live to regret that decision.
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