Why Groupon Is Rushing to IPO [Updates-2]

You might not think that Groupon was in a hurry. After filing SEC paperwork in early June, the company still hasn't had its IPO. In fact, Groupon has had enough time to amended its S-1 statement four times -- largely because of SEC concerns over its wacky accounting terms. Pretty amazing as the company has only closed out one quarter since the first version.

But, fact is, Groupon is anxious to get its IPO done now and plans to launch its IPO roadshow early next week, even though it knows it won't get the amount of money it once thought it might. Why? First, the sooner it's done, the more certainly the company doesn't have to explain even more about its current quarter's numbers. Secondly, for all the brave talk, Groupon is nervous about cash flow, and right now an infusion of cash from some strangers, kind or not, is exactly what it needs.

[Update 1: New reports have more details, such as Groupon aiming to sell shares at $16 to $18 each for a total of $540 million and a valuation of $11.4 billion, or less than half of what it previous expected.]

Numbers don't flatter like words
Groupon has become a whipping boy of critics because the company's financials look so freaky. It has always lost money -- spectacular amounts -- and even created an accounting metric at one point that would ignore all of the massive marketing costs for acquiring new customers. It's something that will end eventually, Mason insists.

Just one problem: that need probably won't end. To get interest from the capital markets, Groupon has to show growth for the foreseeable future. However, as I've pointed out before, a easy calculation on Groupon's own numbers show that the average customer keeps buying fewer deals per quarter. The trend is about as long as the company is old.

It makes sense. Consumers get enthusiastic about something, but most tire of their new found fascination as other things begin to attract them. It doesn't mean a company can't grow, but it gets harder. Unfortunately for Groupon, if the existing customer base buys less and less, the company has to find more customers. Thus, the acquisition marketing costs won't really go away.

Finish the deal before the news hits

Without those costs dropping, Groupon is unlikely to start looking like a good investment. Every time something reinforces that message, it puts the company into an even worse light. For example, there was that little memo CEO Andrew Mason sent to employees in which he attacked critics during the company's extended quiet period. Amazing how a management mash note somehow leaked to the press. Who'd have thought it?

With the third quarter having closed in September, Groupon will be due to update its S-1 filing with the SEC. Again. The company didn't report its second quarter results until August 10, or about 5 weeks after the quarter ended. That would suggest Groupon would have to update its S-1 by mid-November. Better get everything closed up now, which is why you hear the rumors that it's launching its IPO roadshow next week. Move fast enough, and it might be able to avoid the bad news.

Looking for coins in the company lounge sofas
The other issue is cash flow. Mason argued in his memo that the company was in fine shape -- no money worries at all. But when you keep losing lots of money every quarter and the vast bulk of $950 million raised in January went to cash out employees and early investors by March, that's whistling past the economic graveyard.

As of June, Groupon had $225.1 million in cash. The company already stretches payments out to its merchant clients from the up-front deal payments it gets. There are some good reasons for this, but still, it's not flush with cash and it keeps spending like a politician with a credit card. Savvy big investors would be pretty demanding on terms if they were to offer another round of funding.

Groupon needs this IPO. It needs to close a big amount of cash and it needs to do so before the latest results -- and they're unlikely to have suddenly swung into a strong profit -- give people an even bigger pause to pulling out their checkbooks.

[Update 2: Groupon has already filed its amended again S-1. The company is claiming a loss of only $239,000 for the most recently-closed quarter. Light at the end of the tunnel? Who knows? So far as I've been able to find, there is no quarterly breakout that breaks out the expense categories as you might expect. Mason said in his memo that marketing spending was down 20 percent in August, but that alone wouldn't seem to do it. I've asked Groupon's PR firm to point me to the right page in the S-1 that will make this clear. I'll update when I know more.]

Related:

• Hulu Goes Off the Market And 4 Other Corporate Flip-Flops
• COO Runs, Doesn't Walk, as Groupon Restates Revenue
• Groupon Is Back on the IPO Track to Hit the Cash Trough
• Volatility in Management, not Markets, Gets Groupon to Hold Its IPO
• Groupon Might Be Fine, If Only Its Customers Weren't Burning Out
• What Groupon's CEO Didn't Tell His Employees in That Memo