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Nov 7, 2011
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Groupon travels 'tortured' road to Nasdaq

Nov 7, 2011

When Groupon Inc filed its plan to go public with U.S. regulators in June, Chief Executive Andrew Mason proclaimed in a letter to prospective shareholders that "life is too short to be a boring company."

Chief Executive Andrew Mason / Photo: Reuters

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 U.S. 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 realized 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 U.S. 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.

But then over the summer, the European debt crisis worsened, the United States lost its triple-A credit rating, and equity markets went into a tailspin.

Increasingly cautious investors began to pick through Groupon's public financial statements, poking holes into what had been viewed as the fastest-growing Web start-up in history.


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.

At a board meeting in late August, Groupon's directors questioned Mason, Chief Financial Officer Jason Child and then-Chief Operating Officer Margo Georgiadis about the revenue hiccups, according to a former employee.

The three executives were asked to take the directors through an early draft of the IPO roadshow slides. The feeling among some of the directors was that they stumbled through the presentation and were not ready, the former employee said.

This was the first time the roadshow was presented to the board and the directors critiqued it because they wanted to make sure the executives got it right, long before they started to pitch investors, a source close to the board said.

Mason, a former music-studies major known for pranks and jokes, came under enormous pressure and became much more serious around this time, according to the ex-employee.

In early September, Groupon put its IPO on hold. Then, Georgiadis left for Google, the second COO to depart this year. She said Groupon was on a "terrific path" but her exit added to a sense of turmoil at a crucial time.


Groupon, which declined to comment on the board meeting or on private discussions with investors, was nonetheless still determined to pursue a public listing.

Mason was frustrated that he could not respond publicly to Groupon's many critics because of SEC rules limiting promotion of IPOs ahead of the listing.

He tested the limits of SEC rules when he wrote a memo to employees in August, lashing out at Groupon critics and divulging new financial information. He pinpointed a media story that asked whether Groupon was running out of cash.

"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,'" Mason wrote in the memo that was leaked and widely reported in the press.

"While we've bitten our tongues and allowed insane accusations (like in the article above) to go unchallenged publicly, it's important to me that you have the context necessary to brush this stuff off," he wrote.

Around this time, a top underwriter on the IPO mentioned the idea of scaling back the IPO to Lefkofsky, Groupon's chairman. The move would help Groupon get on the road more quickly, letting it answer critics, the banker said.

The turning point came in October, when Groupon announced that it was shrinking its IPO and nearly halving the valuation. Existing shareholders agreed not to sell, and the IPO would raise about $540 million, instead of $750 million, and value the company at about $11 billion.

Mason and the executive team polished their presentations and hit the road on Oct. 25, crisscrossing America to visit investors in Baltimore, Washington, D.C., Boston, New York, San Francisco, Denver, Los Angeles and Chicago.

Michael Moe, head of GSV Capital Corp , which invested in Groupon in August, gave credit to the company for fighting its way out of a negative news cycle.

"The smart thing was to get out on the road and start telling their story," Moe told Reuters. "They put a price on the cover that put fans in the stands. Then they let the market price it. Putting too high a price would have dissuaded investors from considering it properly."

Several money managers said they were impressed by Mason's charm offensive. One fund manager described the CEO as composed, confident and articulate, "He was as presidential as a 30-year-old can be."


On Thursday, Groupon priced its IPO at $20 a share, above the targeted range of $16 to $18, and increased the issue to 35 million shares from 30 million. The IPO raised at least $700 million and valued the company at almost $13 billion.

If the underwriters exercise their option to buy more stock, Groupon will raise more than $800 million, before fees.

The IPO is the largest from a U.S. Internet company since Google raised $1.7 billion in 2004.

But in terms of the percentage of shares sold, the IPO is one of the smallest floats of the past decade. That could pressure Groupon shares in coming months, analysts said, citing concerns about additional share sales.

"Much of this pop is based on the low float," said Michael Yoshikami head of money-management firm YCMNET Investment Committee. "We continue to be concerned about Groupon's model, especially given the low barrier for entry into this space."

"I expect this stock to come back from its price and settle near $15," he added. "Above that seems too frothy for me."

By Alistair Barr and Clare Baldwin

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