It was only about six months ago that investor excitement for a Groupon IPO was so high that its expected valuation was $25 billion. Now, institutional investors are wary. A fund manager quoted in a Bloomberg report today suggests that Groupon might have to reduce its IPO valuation to between $3 billion and $5 billion in order to get it out the door. That valuation would be below the $6 billion acquisition offer Groupon turned down from Google last year. Another fund manager says that Groupon may have to delay its IPO further or even pull it.
All of this goes to show that six months can be an eternity when it comes to the IPO window. Since the days not so long ago when nobody blinked at its proposed $25 billion valuation, Groupon has taken a beating for some of its accounting practices, cash burn rate, and other financial details revealed in its SEC filings, which have been revised several times. Last month, it restated the way it accounts for revenues to a more conservative set of numbers, and announced that it lost its second COO in less than a year. It is facing increased competition from Google, LivingSocial, Facebook, and hundreds of other smaller startups. And of course, the overall stock market’s downward spiral isn’t helping matters any.
Delaying the IPO may not be a bad idea if Groupon can cut its costs (a big part of which is marketing and sales) to a more sustainable level. Without slashing costs, it will find itself in a cash crunch. The company spent $432 million on marketing in the first 6 months of 2011 ($345 million of which was on online marketing to acquire new subscribers). It had $225 million in cash.
Despite the IPO drama, Groupon still dominates the daily deal market and is introducing strong new products such as Groupon Rewards, which could deepen its relationships with local merchants. If Groupon pulls its IPO and then files again in a year with profits and a much stronger financial condition, investors will have a better idea of how to value to the company.
Image credit: Thomas Bower