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Groupon IPO has gall

roeder report

David Roeder reports on real estate at 6:22 p.m. every Thursday on WBBM-AM (780). The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday.

Updated: September 24, 2012 6:25AM

In the industry that tracks initial public offerings, there is a need for winners. The IPO market has been in a slump for years, and it just recently has perked up with interest in a new generation of companies that show potential for making money from the Web.

Hedge funds and other managers of huge sums want to believe Groupon will work, because they will cash in on the early, discounted price of a successful IPO. Finding that kind of easy money has been beyond most managers’ abilities lately.

In Chicago, Groupon’s home, the need to believe almost aches in the business community.

Civic boosters see a company employing 2,100 people in Chicago, about the number of people who work at the Oak Brook headquarters of McDonald’s (MCD). Groupon was just a tiny startup in 2008.

Chicago never had much of a share of the great technology boom, and Groupon could fix that. It would certify the city as a hospitable place for innovation. With a business that connects merchants to new customers via coupon offers, Groupon is a perfect fit for Chicago, once the mail-order capital of the world.

With its headquarters in the old Montgomery Ward complex at 600 W. Chicago, the symbolism couldn’t be stronger.

Rooting for Groupon in some quarters is an article of faith. But the prospectus it filed for its IPO is enough to rattle most believers.

Groupon has lost $540 million since its launch. It spends heavily to enter new cities and vie for new customers, and the company does not project when it will turn a profit.

In a letter to potential shareholders that was part of the IPO filing, co-founder and chief executive Andrew Mason spoke with the disarming candor of a hip tech executive and made three points: We will make mistakes, we will spend profligately and we will be distracted from our core business. Dividends? In your dreams.

It’s an interesting way to solicit money. Mason is trying to say that Groupon wants to create a sustainable brand that one day will operate on such a scale that its vast marketing expenses will shrivel by comparison.

“If people go to Groupon the way they go to Facebook or Amazon [AMZN] or eBay, [EBAY] then they have a viable business model. I don’t know if they’re going to get that,” said Bill Buhr, IPO strategist at Morningstar.

He thinks Groupon’s challenge is maintaining customer loyalty. A Bloomberg story said with the news service’s customary aplomb that Groupon has 482 competitors, but it didn’t cite a source for the count. Still, the competition is vast and now “coupon aggregators” are on the Web.

One thing Groupon has gotten right is the timing for going public, Buhr said.

“I don’t think they wanted to do it this quickly, but LinkedIn [LNKD] showed there is a huge demand for this space,” he said.

Mason’s letter talks about his commitment to constantly reinventing the company. And he draws investors’ attention away from such mundane measures as net income to something new, Adjusted Consolidated Segment Operating Income, or Adjusted CSOI.

“[W]e think of it as our operating profitability before marketing costs incurred for long-term growth,” he wrote.

Buhr said it’s a red flag when companies highlight “some number that they just made up.”

Mason also wrote: “In the past, we’ve made investments in growth that turned a healthy forecasted quarterly profit into a sizable loss.”

They could do that with seed money, then second-stage investor money, then money from preferred shares sold privately, and now they propose to do that with IPO proceeds that are unquantified at this point. The $750 million in the filing is just to whet appetites. Some experts think Groupon could raise $3 billion.

The banks running this deal could make a fortune. Employees could get rich by selling out. Great for them. As for the rest of us, we can’t say we weren’t warned.

Can Groupon issue a half-off coupon on itself?

THE CLUB SCENE: Analysts at William Blair & Co. were impressed with the latest quarterly results for warehouse club Costco Wholesale (COST), despite a surprising $49 million charge to write down the value of inventory. The charge caused profit to miss targets.

The Blair team said it would buy the stock on weakness. Costco closed Friday at $77.81 and the shares have fallen from around $83 in mid-May.

CLOSING QUOTE: On criticism of an escalating pay package for CME Group (CME) chief executive Craig Donohue despite the stock showing subpar returns, “The stock hasn’t performed. No one is happy about that. We are doing very well as a company but for whatever reason the stock hasn’t performed so they have to withhold vote on his compensation. I don’t think it’s appropriate but at the same time we will deal with the shareholders at the meeting and explain our viewpoint on why it’s appropriate to keep someone like Craig at the compensation we have today." —CME Group Executive Chairman Terrence Duffy on Fox Business Network. CME’s annual meeting is Wednesday.

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