The Groupon IPO
from
$20 billion
Buy!
The Challenges
in Communicating
Value
Today’s Deal
• Introduction
• Company and industry background
• Challenges facing the Groupon IPO
• Discussion Questions
Introduction
2
June 2, 2011…The IPO Begins
• Groupon files registration with the SEC to
issue shares to the public
• Selling a 5% stake in the company
• Looking to raise ~$1 billion
• Values Groupon at ~$20 billion
Introduction
Source: Wall Street Journal
3
Groupon files for IPO…
…some analysts are optimistic
“Although there are risks involved
in daily deals and challenges for
these companies, local commerce
is a huge untapped market... It's
very competitive and not all
companies will make it, but there's
a lot of money to be made.”
Jeffrey Grau
Introduction
Source: Reuters
4
Groupon files for IPO…
…some analysts have concerns
“There is no rational math that
could possibly get anyone to the
valuation Groupon thinks it
deserves. This IPO game isn't
about finding value, it's about
finding a greater fool who actually
believes the valuation is true.
Trust me, you will be the fool.”
Sucharita
Mulpuru
Introduction
Source: Reuters
5
Groupon’s Founding and History
• Nov ‘07: Mason starts The Point
• Oct ‘08: Groupon posts first offer
• April ‘10: Initial expansion into
foreign markets
• Oct/Nov ‘10: Rejects buyout
offers from Yahoo! and Google
• Currently 9,600 employees and
offering deals in 45 countries
Background
Andrew Mason
CEO &Co-Founder
6
The Groupon Culture
• Off-beat, quirky, laid back, different (and proud of it)
– “We want the time people spend with Groupon to be memorable.
Life is too short to be a boring company. […] we seek to create
experiences for our customers that make today different enough
from yesterday to justify getting out of bed.”
• Inside jokes in deal descriptions
– “Like planet earth, pizza contains morsels buried in its outer crust
that can be pieced together to form a crude brontosaurus. Partake
in culinary archeology with today's Groupon to Pizza D.O.C..”
• “Our customers and merchants are all we care about”
Background
Source: Groupon website, SEC Form S-1
7
Business Model Overview
• Deep discount (50%+)
• Minimum sales to make the
offer valid
• Limited time to purchase
and redeem the coupon
• Deals offered by local
businesses
• Groupon takes large portion
of coupon revenue
100%
80%
Merchants' Share
60%
40%
Groupon's Share
20%
0%
Q1 2010
Q2 2010
Q3 2010
Background
Q4 2010
Q1 2011
Q2 2011
8
Huge Margins, Low Barriers to Entry
Background
9
Foreign Expansion &
Legal Challenges
• 57.3% of revenue from
international operations
• Domain squatting
• Copycat sites
Background
10
Why and When to Go Public…
Groupon says…
• Need for funding to
“We intend to use the net proceeds to us
continue to expand
from this offering for working capital and
other general corporate purposes, which
• Opportunity for VC/PE
may include the acquisition of other
businesses, products or technologies.”
investors to monetize
• Traditionally, demonstrated record of
profitability prior to IPO
20
Median Age of Firms Going Public
15
10
5
0
Background
Source: Jay Ritter, University of Florida
11
The Long Road to Go Public
Assemble
the team
Respond to
SEC
comments
Syndication
Retain
underwriters
SEC review
Road shows
Buy!
Perform
due diligence
Present
preliminary
prospectus
Final
prospectus
S-1 becomes
“Effective”
6 to 12 months
Background
Source: PricewaterhouseCoopers
12
Culture Clash with Investors?
Can Groupon be
different and still
be credible?
Will Groupon
change its
communications
with customers,
merchants, or
employees?
Challenges
Investors
demand
credible,
reliable
information
How much does
Groupon care
about
shareholder
value?
How can Groupon
provide insights to
investors without
compromising
competitiveness?
13
Meet Jason Child
Biography – Groupon Website
Jason Child
Groupon CFO
Challenges
“The only businessician in a family of artists, Jason Child has
run 14 marathons, each one a kinetic sculpture of physical art.
With his wife and two children strapped to his back, Jason also
has skied down Austria's toughest mountain without slipping
and falling into a coma even once. Before fighting off a midlife
crisis and joining Groupon, Jason worked as CFO and VP of
Finance for Amazon.com's international division, and he has
lived and worked in Munich, Tokyo, and Seattle. Jason enjoys
traveling with his family, and one day hopes to complete a
whirlwind tour of every Groupon country either for business
purposes or with a juggling troupe composed of his cousins and
father.”
Source: Groupon website
14
Meet Jason Child
Biography – SEC Registration Statement (Form S-1)
• Groupon CFO since December 2010
• March 1999 - December 2010, positions with Amazon
Jason Child
Groupon CFO
–
–
–
–
–
VP of Finance, International
VP of Finance, Asia
VP of Finance, Amazon Germany
Director of Investor Relations
Director of Finance, Worldwide Application Marketing and Business
Development
– Global Controller
• Prior to Amazon, 7+ years at Arthur Andersen
– CPA and consulting manager
• BA, Foster School of Business at the University of
Washington
Challenges
Source: SEC Form S-1
15
Measuring Value at Groupon
• “We don’t measure ourselves in conventional ways”
• Three primary financial metrics tracked internally
– Gross profit – Gross billings less Payments made to merchants
– Free cash flow – Operating cash flow less Capital expenditures
– Adjusted consolidated segment operating income (loss) –
Operating income before new subscriber acquisition costs
Challenges
Source: SEC Form S-1
16
Groupon Financials
$800,000
713,365
644,728
$600,000
$400,000
$ in thousands
279,954
270,000
$200,000
94
5
81,619
60,553
30,471 10,929
3,484
$(1,077)
(1,632) (1,446)
(117,148)
$(200,000)
$(400,000)
(420,344)
$(600,000)
2008
2009
Revenue
Challenges
Gross Profit
2010
Operating Income (Loss)
Q1'2011
Adjusted CSOI
Source: SEC Form S-1 (initial filing)
17
Violation of quiet period
Quiet Period
• From the filing of S-1 until it becomes “effective”
• Banned from promoting your company publicly
Andrew Mason says to employees…
I’ve never been more confident and
excited about the future of our business.
For now we must patiently and silently endure a
bit more public criticism as we prepare to birth
this IPO baby… having seen the ultrasound, I
can promise you [it] is not one of those uglies.
18
Restatement of Financials
$2,000,000
1,597,423
$1,500,000
$ in thousands
$1,000,000
745,348
$500,000
688,105
312,941
94
34,082 14,540
5
$(1,077) (962)
(1,632) (1,608)
(180,993)
$(500,000)
(160,593)
(218,175)
(420,344)
$(1,000,000)
2008
2009
Billings
Challenges
Revenue
2010
Operating Income (Loss)
Q2'2011
CSOI
Source: SEC Form S-1 (amended filing)
19
Evidence of strong tech IPO market
PwC says…
Q1 IPO Volume and Proceeds Raised
$25.0
$20.0
Volume
$15.0
Proceeds
$10.0
$5.0
43
43
2004
2005
54
68
$2006
2007
25
2
29
32
2008
2009
2010
2011
This is one of the best first
quarters we’ve seen in years,
demonstrating the increasing
attractiveness of the US IPO
markets for generating
capital and providing liquidity
for financial sponsors
$15B
5/19, $4.2B
6/15, $2.6B
1/27, $1.5B
$80B
5/24, $8B
Jan
Feb
Challenges
Mar
Apr
May
Jun
Source: PricewaterhouseCoopers
20
Market volatility and weak
economic outlook
Record
Zynga
number of delays IPO
IPOs delayed
Groupon files
for IPO
VIX
Groupon
delays IPO
S&P 500
4/1/2011
Challenges
5/1/2011
6/1/2011
7/1/2011
8/1/2011
9/1/2011
21
Discussion Questions
• Should Groupon proceed with the IPO process?
• If it should not go public, why not? What issues must
Groupon overcome first?
• If it should go public, what message should Groupon
convey to investors in the roadshow?
• What kinds of investors should Groupon be targeting?
Discussion
22
Discussion Questions
• How should Groupon ease investor concerns about its
business model and the mistakes it has made in the
IPO process?
• How should Groupon reconcile its offbeat culture with
investor expectations?
• How should Groupon communicate more effectively
with its investors in the future?
Discussion
23