Groupon pulls off IPO by cutting valuation, float

When Groupon Inc filed its plan to go public with US regulators in June, Chief Executive Andrew Mason proclaimed in a letter to prospective shareholders that "life is too short to be a boring company." In the months that followed, the daily deals website, which offers discount coupons for local shops and services, was anything but boring as a series of blunders threatened its initial public offering.
Groupon changed its accounting twice under pressure from regulators, lost its chief operating officer, and faced questions over whether CEO Andrew Mason was too unpredictable for Wall Street after a sensitive internal memo was leaked. "Not boring and bordering on insane," said Scott Sweet of research firm IPO Boutique. "I've done more than 10,000 IPOs and secondary offerings over 39 years and this one is up there among the most tortured."
Amid plunging stock markets, Groupon delayed the IPO in September, then it slashed the size and valuation before embarking on a roadshow last month to woo investors. Groupon finally debuted on Nasdaq on Friday. A tiny 5.5 percent flotation helped shares jump more than 30 percent, valuing the company at nearly $17 billion. That scarcity helped Groupon get the deal done but analysts warned the stock could come under pressure down the road, if venture capital investors try to sell their holdings, or the company runs into bumps on the road to profitability.
Earlier this year, before Groupon filed to go public, one such venture capitalist tried to persuade Mason to wait. The European debt crisis loomed and valuations of publicly traded technology companies were depressed, the investor argued. Moreover, Groupon's subscriber growth was impressive but it was still losing lots of money. New rivals were emerging and Groupon's efforts to diversify were just getting started, the investor said.
The theory was that if Groupon waited, its business would mature and losses would decline, increasing its appeal to more-conservative Wall Street investors. If Groupon went ahead but had to pull the offering, it would take a long time to recover from the fiasco.
Mason, 31, listened but forged ahead anyway. "Andrew listens a lot and takes everything in and is great with numbers and data. But they made their own decision to go public," said the investor, who did not want to be identified because deliberations over financing options were private.
On June 2, Groupon filed its IPO prospectus with US regulators and listed Morgan Stanley, Goldman Sachs and Credit Suisse as the banks that would lead the offering. Interviews with dozens of people involved in the IPO - including bankers, investors, current and former employees - paint a picture of the excruciating path Groupon took to become the first daily deals site to go public in the United States.
One of the reasons Groupon was keen to go public was that its board of directors realised the company would soon have too many shareholders to remain private - after various rounds of financing and amid active private trading of pre-IPO shares. The US Securities and Exchange Commission requires a company with more than $10 million in assets and equity held by 500 or more individuals to publicly disclose its financials.
Mason also wanted to get the IPO done before his fall wedding to "dream-pop" musician Jenny Gillespie. In late May, Groupon's board considered stock market conditions receptive for an IPO, with the tech-heavy Nasdaq Composite Index close to its year high, according to a person familiar with the company.
Groupon could also use proceeds to fund future growth in a nascent industry that was nonetheless rapidly consolidating, the person added, speaking on condition of anonymity. The ultimate decision was made by the board, comprising Mason, Chairman Eric Lefkofsky, MediaBank Founder Brad Keywell, Peter Barris of venture capital firm New Enterprise Associates, Kevin Efrusy of Accel Partners, Mellody Hobson of asset manager Ariel Investments, former AOL executive Ted Leonsis and Starbucks founder Howard Schultz. In discussions with bankers, Groupon was hoping for an IPO valuation of more than $20 billion, far above the $6 billion that Google Inc offered for the company in late 2010.
DUBIOUS METRICS Wall Street became increasingly concerned about Groupon's business model. The daily deals market was growing fast but it was also getting very crowded, with many deep-pocketed rivals including Google, Amazon.com Inc and AT&T Inc.
Groupon was still the market leader, but investors found cracks in its facade. In particular, they focused on its use of a controversial accounting metric called Adjusted Consolidated Segment Operating Income (ACSOI), which excluded marketing expenses, stock-based compensation and acquisition items.
For example, Groupon reported ACSOI of almost $82 million for the first quarter, after stripping out some $180 million of expenses. Groupon's IPO underwriters saw red flags, and expected a pushback from securities regulators. "We laughed. We knew the SEC was going to puke all over it but there was a big group of advisers and the company wanted to do it," one equity capital markets banker said.
Groupon later abandoned ACSOI under pressure from the SEC. Beyond the accounting, investors were also concerned about whether Groupon's rapid growth rate was slowing. In the second quarter, sequential revenue growth had slowed to 36 percent, from the first quarter's 63 percent. By the time Groupon disclosed third-quarter results, it had changed how it reported revenue to exclude the cut it gives merchants. On this basis, revenue rose less than 10 percent from the second quarter.