After one of the worst initial public offerings since the dot-com crash, Groupon is picking up the pieces and trying to figure out what went wrong. The popular "deal of the day" website that lands customers good deals on everything from restaurants to car repair shops closed at $26.11 on Nov. 4, the day of its IPO. Today it's right around $12.
So what went wrong? What lessons can we take away from Groupon's IPO?
First, Groupon didn't sell high enough. The company has a current market capitalization of $12 billion, but only brings in $1 billion in revenue and negative earnings. That's expecting too much from investors. Inc.com actually suggests businesses might want to overprice their company, although "most management teams never believe their company is overpriced."
Second, make sure all your paper work is cleaned up before going public. Groupon was well-known to have several bad accounting errors and regulatory missteps, in addition to increasing losses.
"The SEC ran (Groupon) through the mud on their accounting practices, revenue recognition and the model," Lou Pizzileo, a partner for New York-based J.H. Cohn LLP told Bloomberg News. "All that happened in public purview. That certainly doesn't help post-IPO stock performance."
While honestly is the best policy, Groupon actually didn't need to report about its internal accounting errors in its prospectus until after it went public. In 2002, Congress passed the Sarbanes-Oxley Act in response to the Enron and WorldCom scandals. The Act essentially added two main sections to a public company's prospectus about the company's internal controls, but the key word is "public" company. That act doesn't apply to companies that have only registered for an IPO.
Even ff things wouldn't have changed in the company's accounting department, the messy numbers (it's 2011 4Q revenue had to be adjusted down $14.3 million) would have likely still come out. The SEC plans to start an investigation soon for its troubling accounting practices.
Another lesson to follow is respect your investors' need to sell their shares. Most companies go public to raise money, but Groupon had $244 million in cash and very little debt -- they weren't struggling financially. Their private investors were proud of the great job they did with their investment and wanted to cash out and create a liquid market for their shares. Inc points out that if you're in a management role or are a longterm investor, hang on to your shares and let your investors buy and sell their shares as they please.
Groupon is slowly on the rebound. Analysts expect an 8 percent growth in revenue in its first quarter from its fourth quarter. If it cleans up its accounting mess, which many have believe it has, investors may put more confidence in the daily deal market website, which is good, because the company's total value remains high, even though its stock price is low.
"The core lesson, which a lot of companies have already taken to heart, is make sure your business is well-baked before you take the company public," Mike Volpi, a partner at a San Francisco investment firm told Bloomberg. Articel Courtesy of http://www.calbanktrust.com/smallbusiness/
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