Saturday, June 04, 2011

Groupon's IPO

As expected, the announcement of Groupon's IPO has provided cable business channels with plenty of grist for their programming. And it's put more young social networking pundits on air, too.

For example, on Friday afternoon, I found myself watching a 20- or 30-something tech blog editor opine on the Groupon IPO. As I listened to his answers to questions from a Bloomberg anchor, I wondered how old this guy was when TimeWarner merged with AOL in the first of the major over-priced internet deals.

And since it made the news on the same day as a disastrous drop in the BLS monthly employment report, the Groupon IPO news provided a rather nice bookend in terms of being a potential valuation and market peak.

CNBC, Bloomberg and the Wall Street Journal were all full of interesting details from the Groupon offering package.

For example, Andrew Mason, his co-founders and some early investors have already siphoned about $800MM out of the firm from prior financings. The annual run rate of losses has been nearly half a billion dollars. The capital structure of the firm will allow class A founders shares to essentially control the firm, with public class B shares apparently being given little more than income and valuation participation.

Then there are the juicy quotes from Mason that the firm will try significant new businesses, one or more of which will be failures.

Several business cable anchors mused whether that is the sort of strategic thinking that investors are going to like hearing.

Probably not. Then, again, there are almost certain to be enough gullible buyers to make the point moot.

Perhaps the most illuminating and useful analogy was whether Groupon will become like Webvan or Amazon? I have yet to hear anything to change what I wrote in this post a little over two months ago. Despite Mason's contentions to the contrary, Groupon doesn't appear to have much in the way of barriers to competition.

A Wall Street Journal article provided anecdotal evidence from actual shopkeepers regarding how much competition already exists among online group couponing services. Add Facebook, Google and any other firm with a large list of email addresses, and Groupon's value sinks even further.

From an end user standpoint, I remain one of those who have become listed with Groupon, but have yet to spend a dime with them. Of the daily offers which stream into my email inbox, I've seen perhaps three in the two months or more that I've received them to which I gave even a second thought. I realize I may not be their primary target segment, but that only means that the ratio of paying users to listed ones is extremely important.

I suppose the most important piece of information regarding Groupon's IPO is the knowledge that it will have cashed its founders and early backers out at obscene profits, while only floating something like 20% of the company's equity. Since Groupon is primarily an online venture, as was AOL, without the physical infrastructure of an Amazon, it somehow smells of a get-rich quick scheme in which there's nothing very tangible about the company to suggest its founders will have long term ties or exposure to making it perform consistently better than the equity market average over the long term. For example, Amazon hasn't really met a viable competitor along its entire product/market space, particularly the online-shopping-to-fulfillment segment. Perhaps that's because of the fairly sophisticated global online general store logistics it has had to create, refine and manage. That took software, warehousing, many vendor relationships, and ongoing maintenance thereof.

Groupon suggests more of an ephemeral online-only presence, with a sales force soliciting vendors. Not tremendously complex or suggesting of lasting commitment to the business. Just much less of a tangible nature to own.

As I wrote that, Priceline came to mind as a firm that's appeared frequently in my equity portfolios in recent months. Originally, when it entered for the first time, I thought it to be somewhat of a joke. But it's been a consistently superior performer, both fundamentally and in total return terms, for years. It has a patented methodology at its core, and attained a first-mover advantage, like Amazon, that has limited subsequent direct competition. Plus it has apparently lasting and effective ties to sources of hotel rooms and flights, so that buyers join and create the ongoing dynamic of filling those excess capacities.

Perhaps several years from now, I'll be writing similar observations about Groupon. But at present, from its self-description, my own experiences, and what I've read about it, I rather doubt that. At its base, Groupon is really just an updated spin on old fashioned marketing by way of couponing. I don't recall that being a widely successful, publicly-owned business model. And I don't believe sticking the social networking aspect onto it will change that.

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