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With Groupon shares at new low, will founders save it?

GroupCEO Andrew Mastalks during fireside chNorris Center Northwestern University Wednesday May 23 2012. | Tom Cruze~Sun-Times

Groupon CEO Andrew Mason talks during a fireside chat at the Norris Center at Northwestern University Wednesday May 23, 2012. | Tom Cruze~Sun-Times

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Updated: December 14, 2012 6:13AM



The three co-founders of Groupon Inc. have made about $570 million from the company from cashing out early holdings. Now that its stock has collapsed, will they risk that money to save it?

Groupon shares, which have fallen steadily for about a month, declined Monday to a new low, $2.69, losing 7 cents on the day. The shares fell more than 30 percent last week after the coupon deal site produced third-quarter earnings that horrified Wall Street.

But the Groupon story is about more than revenue or whether the chronic money-loser will ever turn a profit. Analysts are focusing on declining growth rates and the company’s difficulty in securing repeat business from merchants and coupon users.

The viability of the whole business is in doubt. While Groupon has seen some success by branching out into retail goods, investors remain unimpressed.

Groupon reports $1.12 billion in cash on its books, which translates to about $2 per share. It is trading for only 69 cents a share more than the contents of its bank accounts.

Co-founders Eric Lefkofsky, Andrew Mason and Brad Keywell could decide to take the company private, reversing the $20-a-share initial public offering of a year ago. Another alternative would be selling the company.

“They could try a leveraged buyout, but I don’t know if there’s anyone to help take it private, whether it’s the management or some angel investor,” Chicago securities lawyer Andrew Stoltmann said.

The co-founders “have received their payments already,” Stoltmann said. “I don’t think that they’d jeopardize that fortune.”

Whatever happens, the decision will rest with the co-founders alone. Lefkofsky, the executive chairman, owns 19.9 percent of Groupon’s Class A shares, and chief executive Andrew Mason owns 7.1 percent. But their control comes from their ownership of Class B shares, which carry voting control over company affairs.

Lefkofsky has a 27.7 percent voting stake in Groupon, according to its most recent regulatory filing. Mason has a 19.5 percent voting stake.

The other co-founder, Brad Keywell, owns 6.3 percent of the Class A shares but his Class B stock gives him a 10 percent voting stake.

The company’s filing shows the trio have 57.5 percent voting control.

A Groupon spokeswoman declined to comment for this story.

Lefkofsky has received $382 million from investors in earlier financing stages, including the IPO, company documents show. Keywell collected $156 million and Mason $31 million in the same process, Groupon has reported.

During recent interviews, Lefkofsky and Keywell voiced no regrets about rejecting a reported $6 billion offer for their company from Google Inc. in late 2010. The current value of the Class A shares is just $1.7 billion.

Lefkofsky also tried to define Groupon’s niche in an Oct. 9 appearance before a Chicago audience.

“Maybe Amazon is long-term the Wal-Mart of the Web, but maybe Groupon is the Costco of the Web,” he said.

Analysts have noted troubling trends in Groupon’s reports, however. One is that while growth of the customer base is slowing, it’s earning less money from each active user, $63.96 on average for the 12 months ending Sept. 30 vs. $76.49 for the same period in the previous year.

Analysts at Raymond James & Associates Inc. conducted a survey of 115 merchants who used Groupon and found that 39 percent said they were not likely to run another Groupon promotion over the next two years. They cited a high commission rate and a low level of repeat customers as reasons for their dissatisfaction.

The survey also asked about competitive online businesses. Living Social registered the best feedback from the merchants.

While the decline in Groupon’s share price has hurt those who bought the IPO, other investors might expect the price to pop from buyout speculation.

Writing at Forbes.com, Panos Mourdoukoutas, economics professor at the University of Long Island, said of Groupon, “Traders may want to stay away from the stock, as it may fall further due to end of the year selling by investors looking to write off losses. But investors may want to stay with the stock, as it could be an attractive takeover candidate at these valuations.”



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