Surely you didn't think I'd let the Groupon (GRPN) IPO pass by without saying something.
Yes, the long awaited - and much debated - initial public offering from everyone's favorite online coupon company officially happened on Friday. I hesitate to even call it an initial public offering though, as it's not 'initial', barely 'public', and a questionable 'offer' at best.
I'm not bashing the company or its premise. I'm just saying we've all gotten a little too lenient in what we consider worth raising funds for. It takes be back to the late 90's when anything that ended in ".com" was worth throwing money at... and we all know how that ended.
So, whether you're in a GRPN trade already, are mulling it, or wouldn't touch it with a ten foot pole, here are some of the factoids you need to know that haven't been all that well publicized.
1. The portion of the company that was IPO'd was a mere 5.5`%, to raise $700 million (at $20 per share). The remaining 94.5% of the issued and outstanding shares? Still held by the company waiting for their IPO, or held by the company's top management.
My question - What good is $700 million going to do a company that's theoretically worth [market cap of] $12.6 billion to $17 billion, depending on the price at the time?
The standard answer is, it takes money to make money. I agree... but I don't agree that you always make money by spending money. The business model has to generate more dollars than is required to run it. And, that's where Groupon hits a roadblock.
2. Groupon generated $685 million in sales during the first half of the year, losing $224 million of that.
Assuming the last six months of the year are like the first six, GRPN is poised to drive $1.37 billion in annual sales, and post an annual loss of $448 million in the process. I'll forgive the loss; it's a startup. To pay about 10 times its annual sales though, when the going rate is 2 to 3 times revenue (and that's for profitable companies), has to give you pause.
3. Groupon is spending a ton of money to garner new business, and isn't getting much of a return on that investment.
The company laid out $345 million to purchase e-mail lists of potential customers in the first half of the year, and only turned it into $685 million in revenue. As of the last look in Q2 of this year, the per-customer revenue was $3.20. That's not bad. It's not great, in that it's a little under the per-customer acquisition cost (someone presumed $5.00 per new customer at one point), but it's serviceable for a company that's still figuring out how to maximize its per-user sales.
And, GRPN fans are quick to point out is that once a customer is on board, the company won't need to buy that name again. Ergo, the marketing/acquisitions costs can subside - relatively - as new profit centers (regular users) are garnered and continue to feed revenue to the company.
The problem is, that's not turning out to be the case. Time/activity measurements have already shown that per-user revenue drops off over time. So, if Groupon wants to grow, it (so far) will need to keep spending more to acquire a new customer than it can actually generate in sales from that customer. Something's gotta' give.
4. Groupon still owes its vendors/merchant partners $466 million it can't otherwise pay, in that it only has about $225 million in cash on hand (as of the end of Q2).
I suspect this is the heart of the problem for many would-be investors (including me)... this is a cash flow time bomb, and in a sense, a ponzi - well, not a ponzi 'scheme', but a ponzi framework. This is also what I suspect the diminutive IPO was designed to address. It has to generate new cash flow now just to pay off obligations from two months ago. Yet, the more revenue it drives now, the bigger those future obligations get... and the obligations are growing faster than operating income.
That $700 million can take care of the current obligations, but it doesn't fix the broken part of the business model.
5. The idea is already losing its luster.
Not only are customers losing interest [one of the chief complaints is that it's a rarity to get a coupon a consumer can actually use], so too are the merchants who used Groupon to help expand their business. Their chief complaint? It didn't actually help build the business. It just gave something of value away to a one-time bargain hunter, ultimately costing the merchant more than it was worth.
6. The biggest insiders were out of a big chunk of their positions a long time ago.
This may be the biggest red flag of all. In late 2010 when shares were first issued to raise funds (not publicly, but privately), $573 million of the $950 million the company received went to existing shareholders rather than the company's coffers. Not a comforting sign of prudence or a 'shareholder first' mentality. I don't yet know how the new 35 million shares issued as part of the IPO will affect the biggest insiders/shareholders, other than creating a market for these insiders to sell any remaining shares they own.
To get back to the original question I posed "What was the point of the $700 million IPO?"....
First and foremost, I really do think the biggest goal was to get its near-term obligations paid off before a cash crunch hit. I don't think that was the only reason/benefit though.
The reality is, I suspect the company was also (1) testing the waters for a bigger IPO down the road (2) wanted to generate some publicity for the business, and (3) satisfying the SEC's requirement to be publicly traded. That's it. It doesn't even seem as if Andrew Mason really wanted to do it, even though he'll be far batter off - financially - by getting this ball rolling while the buzz is still strong. It feels like he felt he had to... which he did.
This could have been a golden opportunity for the company to address all the concerns about it and explain a legitimate growth plan (outside of the quiet period, of course). Instead it proceeded with a lot of unanswered criticism in an almost contemptful way, which could ultimately torpedo the stock.
Between that and a ton of new competition starting to pour into the online coupon market - forget the negative businesses metrics - it's tough to be a GRPN fan here. I hate to kick a stock while it's down, but I've seen enough fad stocks come and go to know this is just another one.
OK, I'm done with the rant. Back to business as usual tomorrow.