Happy anniversary, Groupon! Or, how to spot a bad IPO
A year ago, Groupon staged an initial public offering that was as anticipated as it was controversial. As I look back, the one thing that stands out in my memory has nothing to do with the company's finances or its stock. It's this video of Bloomberg's Emily Chang asking Groupon's insiders for an interview outside the Nasdaq Market.
Bloomberg's coverage of Groupon had been excellent -- tough but fair. And while it's customary for CEOs to talk to the press on the day of an IPO, it's certainly not required. Even so, the way Groupon brushed off Chang wasn't so much disrespectful as it was bizarre. Just... bizarre. CEO Andrew Mason strode past Chang with with a shit-eating grin on his face, acting like she didn't exist. Then he turns to her and says, “Try it again.” Same result, same shit-eating grin. His pop-musician wife, wearing what must be the most garish bracelet ever observed in Times Square, looks embarrassed to be at his side.
I remember this video because my first thought was that I would never invest in a company if the CEO acted this way. CEOs often shut out reporters they don't like, but the smugness of this gesture showed insecurity and immaturity, two qualities no one wants in a leader. Of course, Mason is known for his quirky sense of humor but too often it veers into the creepy, like the video of him doing yoga in his underwear. That may play well on Facebook, but why would you trust this man with your money?
Over the past year, many investors have come to a similar conclusion. A year ago, Groupon debuted at $20 a share and surged in a matter of hours to $31, briefly valuing the company at $20 billion. A year later, it's stock is trading at $3.90 a share, or a market value of $2.55 billion. Groupon is worth one-eighth of its market cap a year ago. That should be enough to wipe the grin off any CEO's face.
What happened at Groupon? The company is going through a lot of growing pains. The group-discount business in general has been slowing, as financial data from Groupon rival LivingSocial showed. A year ago, Groupon's revenue was growing at 424 percent. For the most recent quarter, analysts are expecting Groupon's revenue growth rate to slow to 38 percent. The company is trying to renew growth by moving into other areas like payments. But it's also facing other challenges, such as the departure of top talent.
But that's only part of the story. The real reason Groupon has had such a bad first year in the markets has to do with how its IPO was handled. Looking back, there were plenty of warning signs before Groupon's IPO that suggested the stock wouldn't fare well during its first year in the market.
Groupon, like many recent high-profile IPOs, was valued richly by private investors and illiquid secondary stock markets. As Sarah Lacy has pointed out, these private markets did a terrible job at valuing companies before their IPOs, although they helped early investors to cash out before the public markets revalued them at a much lower price.
Even before its IPO, Groupon was cashing out early investors. In two private rounds of funding, Groupon raised close to $1 billion, but 85 cents on every dollar went to investors like Mason and Groupon co-founder Eric Lefkofsky. While founders are entitled to make money as a company grows, it's often a red flag when they sell so much stock so early on.
Groupon went to great lengths to distract public investors from how much it was spending, especially on marketing. Its first IPO filings included an “adjusted CSOI” metric that ignored hundreds of millions of dollars in marketing costs. The SEC made Groupon fix that spurious item. It was another one of Mason's strange jokes, albeit an unintentional one.
There's also the unusually small number of shares Groupon sold in the offering, equal to only 4.7 percent of its total outstanding shares. That was the smallest float since the dot-com era -- most companies will sell 10 percent to 25 percent -- and small enough to ensure a first-day pop as retail investors tried to get in on what looked at the time like a hot IPO.
It wasn't hot for long. Groupon's IPO was more like a flash in the pan. A year later, the stock seems more fairly priced. Groupon may yet revive its stock price with its new initiatives, but looking back the company is a clear case study in spotting a bad IPO: overvalued by private investors; insiders who are working hard to cash out early; shady financial metrics; an unusually small percentage of shares for sale; and a CEO prone to flaky behavior.