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Groupon, Chicago’s shining star, hits new low, draws critics


Updated: July 27, 2012 10:34AM

Groupon grew out of an idea Andrew Mason had for online social activism that changed into online daily deals to become Chicago’s bright new shiny startup.

Now, the sparkle is dimming as the company Forbes magazine dubbed “the fastest-growing ever” has seen its stock value shrink to less than one-third of its IPO price. While its revenues soared in the most recent public report, the daily deals company still is not profitable and faces fundamental issues with its business model.

As Groupon nears its next earnings report, scheduled for Aug. 13, its fellow social media stars Zynga and Facebook this week reported earnings that disappointed Wall Street and caused their stock prices to plunge. On Thursday, when the market was surging, Groupon’s stock hit a new low, dropping 8.7 percent to close at $6.61 a share — 67 percent below its IPO price.

What had been

the place to work in Chicago’s tech world is even losing its luster with some employees. Recruiters report a growing number of Groupon workers calling up to find a new golden opportunity.

Groupon’s rise was swift. It grew exponentially, reaching $500 million in revenue in its third year, an even faster pace than eBay, Amazon, Yahoo, AOL and Google achieved, according to Forbes. It reported revenue greater than that in just the first three months of 2012. Groupon’s staff grew just as quickly and numbers 12,550 worldwide.

Chicago’s hopes for attracting venture capital to build and keep more tech startups rests on its biggest star. But the company faces a number of obstacles. Groupon has been weighed down by high marketing and staffing costs and faces increasing competition from the likes of and Living Social, among hundreds of other local deals sites.

The Groupon headquarters in the former Montgomery Ward building at 600 W. Chicago Ave. epitomizes the hip startup culture, with employees, some barefoot, sitting on bouncy balls instead of chairs, whooping and dancing to celebrate a success and enjoying the quirky ways of CEO Andrew Mason.

But two former employees described the innovative workplace as “a white-collar sweatshop” in which employees sat all day at their computers, communicating only through instant chat, and working well over 40 hour a week. “It was difficult to find time to use the bathroom,” to meet the quota of 32 to 34 deals a day, one said. Both asked to remain anonymous, citing confidentiality agreements.

Despite the market’s misgivings and the murmur of employee unrest, the buzz around Groupon remains, with seven of 15 analysts bullish on the stock, and the six latest changes in major analysts’ ratings, since April, trending positive. Groupon makes its own buzz, too, Tweeting and blogging announcements on a near-daily basis on issues ranging from product improvements to new-market expansion to a campaign to provide books to needy kids.

Mason, with his leading investors Brad Keywell and Eric Lefkofsky, created one of the hottest tech companies in the nation, let alone Chicago.

After turning down a $6 billion offer from Google in December 2010, they decided to take Groupon public. No one ever spoke publicly about why they rejected Google’s overture, but Keywell and Lefkofsky are known to be hands-on managers, even with startups in which they invest, and they had already been involved in two successful IPOs — of print outsourcing company InnerWorkings and freight-logistics firm Echo Global Logistics.

The Nov. 4, 2011, Groupon IPO raised $700 million and gave the company a $12.7 billion valuation. It was the largest IPO for a U.S. Internet company since Google, yet only 5 percent of Groupon’s stock was sold on the public market. In its first day of trading, shares soared 31 percent. Within weeks, the stock had dropped to the $15 range, made a quick recovery, but started declining in February and has continued to shrink in value.

So what happened?

Lou Kerner, founder of the Social Internet Fund, a New York-based investor in fast-growing social and mobile technology companies, said Groupon’s stock is being hurt partly by investor sentiment on Wall Street, but also by a lack of confidence by the money managers who invest in the company day to day.

They “struggle to take Andrew Mason seriously,” Kerner said.

“This is a large company being run by a neophyte,” Kerner said. “Kudos to Mason for starting the company and having the early vision. Groupon is faced with a lot of operational challenges. If he [Mason] looked in the mirror, he’d probably realize he’s not the person to solve these problems.”

Groupon spokeswoman Julie Mossler said the company had no comment.

On Thursday, analyst Ken Sena of Evercore issued a report saying he believes that half of Groupon’s first-quarter revenue growth — positive news that Groupon leaders said was due to technology and better targeting — was instead due to Groupon’s launch of its Groupon Goods business, which sometimes accounts for its revenue at a higher percentage than does the coupon business. Groupon Goods is Google’s answer to Amazon — an online retail site that sells products rather than experiences. A recent Groupon Goods featured a comforter, a travel pillow and a women’s tube top, for example.

Groupon Goods books 100 percent of its sales price as revenue, compared with Groupon booking only the portion of a coupon price that it keeps, according to the report.

Sena also said Groupon’s North American billings in the second quarter look to be trending flat.

One stock analysis firm said it still believes in Groupon and forecasts a healthy future for the company — but cited its leadership as an obstacle. Seeking Alpha earlier this week forecast Groupon’s stock at a $15-per-share target, saying the only delay in its reaching that price is Mason’s well-known quirky behavior, ranging from working as a maitre d’ for a sushi restaurant to find out how the company works, to revealing to TV talk-show host Charlie Rose that Mason hired a man to walk around in a ballerina outfit at Groupon’s headquarters just because. It also cited Mason’s memo to employees written during a quiet period that said “the degree to which we’re getting the s--t kicked out of us in the press had finally crossed the threshold from annoying to hilarious.”

On Thursday, Seeking Alpha said Groupon is being hurt unfairly by social gaming company Zynga, whose stock plunged nearly 40 percent after it reported profits on Wednesday that fell short of expectations. But Seeking Alpha again cited Groupon’s “eccentricities of management.”

Other tech biggies have decided they are better run by someone other than the founder, including Steve Jobs, who stepped out of the way and then returned to bring Apple back to life; Rob Kalin of Etsy, an online handmade crafts market, and David Neeleman of JetBlue Airways.

Some Wall Street analysts were not enthusiastic about Groupon even before the IPO. Morningstar analyst Rick Summer, for example, valued Groupon at $8 from the start, since he says the entire daily deals crowd may not be a good business.

Groupon also suffered some early missteps, having trouble with financial controls and leadership inexperience and turnover.

After Groupon’s second revenue restatement in September 2011, Chief Operating Officer Margo Georgiadis went back to Google just five months into her Groupon tenure. She never explained why she left, but she gave up an estimated $25 million in stock options in the process.

In March, Groupon’s auditor flagged the company for failing to set aside enough money for customer refunds, and Groupon revealed that it was having trouble with its financial controls. Groupon must straighten out the weakness in its internal systems by year-end or potentially be delisted from the stock market.

Groupon, like other social media (Zynga for one) and the dot-com blowups of the past (notably, has a fundamental problem with its business model: It is easily duplicated and has drawn a growing numbers of copycat rivals. Amazon and Google are offering daily deals, and the biggest copycat, Washington, D.C.-based competitor LivingSocial, has roughly half the number of employees.

Groupon is attacking the competition by building another business that has its own set of rivals: Groupon Works, which provides merchants the online tools they need to track and keep customers, and perform other tasks that divert them from their main business.

Groupon Works’ solutions help merchants set up customer reservations, fill seats during slow times and entice customers to return and pay full-price for meals and services.

Mason repeatedly touts the idea that mom-and-pop retailers represent near-unlimited software-solutions growth opportunities since they have so few software solutions to make their businesses more efficient and their internal systems interoperable.

So where does the company go if its stock keeps falling?

Even many Groupon analysts critical of the business model concede that the company is clearly the market leader, and one noted that rival Travelzoo’s stock market valuation ranges from $300 million to $400 million compared with Groupon’s $4.3 billion after Thursday’s close.

Much of Groupon’s stock is held by its three founding leaders — Mason, Keywell and Lefkofsky. The three together hold all of Groupon’s Class B shares and an estimated 33.8 percent of the Class A shares, according to filings with regulators. Institutional investors hold an estimated 41.5 percent of the stock, according to Thomson Reuters. Experts say Groupon won’t be taken private or sold because the leaders wanted to take it public and have benefited from the move.

Mason vowed on May 17 that neither he nor Keywell and Lefkofsky would sell their stock when the company’s stock lockup expired June 1.

Even if the price continues to decline, Edward Woo, an analyst with Ascendiant Capital Markets, said he doesn’t think Groupon would become a penny stock, at least within the next year, because it would have to have a “very significant decline” in its valuation. That would take a highly unlikely combination of declining sales, more accounting issues, mounting losses and a stock market correction, he said.

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