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Groupon decision may come down to egos

/ Source: contributor

Groupon’s decision earlier this week to slam the brakes on its highly anticipated public stock offering at first looked like a case of cold feet after this summer’s global market turmoil. The deal-of-the-day website joins a growing list of hot new web companies rethinking their plans to jump into the public markets.

But could the move simply be motivated by valuation arrogance?

Much as homeowners refuse to lower the asking price for a house they are selling even though prices are dropping all around them, Groupon's management may be thinking the company is worth more than it actually is, analysts say.

"Believe it or not, it comes down to egos," said David Menlow, president of, a research provider based in Milburn, N.J.

"It's the simple arrogance of a management [team] that is collectively unwilling to take a lower valuation," he continued. "The management executives are coming from an environment where they feel like they can't do anything wrong."

Groupon has been valued at as much as $30 billion — a figure that many analysts think is overblown given that the online deal company is not yet profitable.

In a filing with the Securities and Exchange Commission last month, Groupon said it generated $878 million in gross revenue in the second quarter, losing $102.7 million. The company had a net loss of $456 million in 2010 but has been showing steady, big revenue growth.

Menlow suggested company executives are being told by advisers that the company is not going to command the valuations they originally wanted. With a lower valuation, company owners could change their mind about going public, he said.

An alternative, he said, is for Groupon is to reduce the price of its shares. He points to Carbonite, a Boston based cloud-computing startup that went public in August at $10 to $11 a share, down from its original estimate of $15 to $17 a share when it filed with the SEC. He says the stock has since risen about 30 percent over the value of its first trading day.

Last week, Groupon CEO Andrew Mason sent employees a memo praising the company and fighting back against its growing array of critics. The problem is that the SEC frowns on public statements about a company's financial status during the IPO process.

"Rah-rah cheerleading is viewed as promotional marketing," Menlow said.

A Groupon spokeswoman said the company is in a "quiet period" declined to comment on the IPO situation.

The ramifications of the the Groupon decision are being watched carefully by investors and other big name online companies, such as Facebook and Groupon competitor Living Social, which may also have IPO plans. Facebook is reportedly planning go public in the first quarter of 2012 with a valuation of about $100 billion. Living Social is in the process of talking to bankers about going public at a $10 billion to $15 billion valuation, CNBC reported earlier this year.

Groupon's uncertainty could further dampen investor confidence, already shaken by a dreadful summer sell-off.

Lou Kerner, vice president of equity research at Wedbush Securities, said investors could be troubled by Groupon's decision to delay. But he added that whatever happens with Groupon, it shouldn't stop other companies from pursuing their own IPO strategy.

"Certainly, the volatility of the market in the last six months means there's less opportunity for companies to go public that don't have proven business models," he said. "But a company like Facebook has a remarkable model and unless the market deteriorates further, there will be a massive appetite for Facebook."

Menlow agreed that a brand-name like Facebook, which he called "the 800-pound gorilla in the room," won't be affected by the delay of a Groupon IPO. He said, however, that even Facebook might not be valued at its most stratospheric level. He suggested the company could be underwritten at $60 billion instead of the $80 billion to $100 billion that some analysts suggested it could command.

"A reduction in valuation gives every IPO a reason for pause," he said. "It could put a chill throughout the sector, but it shouldn't have a bubble-bursting effect."

He said that it's also still possible for Groupon to strike a private deal.

"I wouldn't rule out a private deal if the Groupon model is as solid as everyone around them thinks that it is," he said. "There is a strong component for greater capital reserves."

Menlow said Groupon has to address concerns being raised by the SEC and the financial issues that critics see as hampering the company's growth. Groupon has used an accounting process that has already received SEC scrutiny. Regulators questioned Groupon's "adjusted segment operating income" accounting metric, which excluded the company's marketing and subscriber acquisition costs. The company amended its IPO filing to eliminate the arcane metric.

In the meantime, potential investors are watching Groupon to see if it improves its profit margins, shows greater growth potential and reduces its marketing costs and expenses.