Groupon a Case Study in How Not to Do IPO

MarketWatch

Commentary: Has the company run afoul of quiet-period rules?

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Daily-deal pioneer Groupon Inc. appears to be hell-bent on becoming the poster child for business schools and budding entrepreneurs on how not to go public.

Since the company filed its IPO prospectus for potential investors on June 2, Groupon appears to be close to running afoul of the "quiet period" that is required of businesses once they file with the Securities and Exchange Commission.

Last month, Chief Executive Andrew Mason wrote a memo to employees about a story he had read (in the car, while driving alone, apparently). The report, one in a barrage of negative stories in recent months, wondered whether Groupon is running out of cash. Mason wrote a long defense of his company's business model, its stance against rivals and an explanation of the bizarre accounting metric used in Groupon's financials that raised eyebrows with regulators. (His message to the troops was obtained by our colleagues over at AllThingsD. Read Mason's full memo.)

Last week, an outside PR person for Groupon pointed another reporter in the direction of that same email, fueling speculation that the memo was written by Mason knowing that it would be leaked. Read Private Equity Hub's run-in with Groupon.

The daily-deal company declined to comment.

Whether regulators are going to step in is the big question. On Friday, John Nester, an SEC spokesman, declined to comment on the matter.

This is not the first time that Groupon has come close to running afoul of the quiet-period rules since it filed its S-1. Just the day after filing, Groupon's chairman and one of its biggest investors, Eric Lefkofsky, told Bloomberg that the daily-deal company was going to be "wildly profitable."

The SEC, though, did not sanction the company after Lefkofsky's comments. The agency's only comment so far on Groupon's S-1 has been to ask for an amendment to the filing that does away with a certain accounting method — called adjusted consolidated segment operating income, or ACSOI, which excludes hefty marketing costs. Groupon filed an amended S-1 last month, drawing a new round of questions.

In addition to the furor over the email sent to staff, Silicon Valley PR veteran Brad Williams, hired only two months ago as Groupon's head of corporate communications, recently quit. A Groupon spokeswoman said it was a mutual decision; Williams did not return calls, but reports indicate that he may have butted heads with Mason.

"It just doesn't seem to get uglier than this," said Rocky Agrawal, an entrepreneur who advises start-ups, of the company's IPO process so far. Agrawal has found serious problems in Groupon's financials and has written about his concerns.

Attorneys appear to be split on whether Groupon has violated the SEC's rules, and whether employee communications can be considered speaking to potential investors. In 1996, San Francisco-based Wired had to pull its IPO after magazine publisher Louis Rossetto wrote a similar rally-the-troops email. In 2005, the SEC revamped its rules, albeit slightly.

It is reasonable to think that Mason wrote the memo purely to spur morale, feeling frustrated by the restrictions imposed by the SEC. But how he handled this communication is calling attention to his leadership.

Mason has fashioned himself as a sort of David Letterman CEO — quirky and funny, with an odd sense of humor that pervades the company, its deals and even its poorly received Super Bowl ads in February.

But he cannot be so naive as to not realize that sending out a lengthy, defensive-sounding email to thousands of employees would not end up in the press eventually. There are other, more concise ways Mason could have communicated. He also barely reminded employees of the regulatory restrictions that Groupon is under, only to say "we've refrained from defending ourselves publicly," and that "for now we must patiently and silently endure a bit more public criticism as we prepare to birth this IPO baby."

Under the harsh spotlight of the IPO, when companies are required to refrain from actions that might be seen as pumping up the stock ahead of the debut, Mason's behavior seems childish and impetuous.

"I have been doing this a long time," said Scott Sweet, senior managing partner at the IPO Boutique, about following the market for initial public offerings. "That IPO really bothers me."

Sweet's concerns include the issues that have been noted in recent months: the firm's high marketing costs, major competitors and heavy losses. But he is also now calling out Mason, Groupon's eccentric chief.

"No matter how the CEO spins it, he is not talking to the choir," Sweet added. "He is talking to his ego."

Whether this brouhaha will affect how Groupon is received by investors has yet to be seen. The company has not yet started its road show to tell its story. But so far, it's serving as a textbook case on what not do to during the IPO process.

Therese Poletti is a senior columnist for MarketWatch in San Francisco.

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