Groupon Files for Hotly Anticipated IPO

Online coupon seller Groupon Inc. is dangling its most tantalizing deal yet - an initial public offering of stock.

The prospect is likely to intensify a debate about whether an investment bubble is forming around promising but still unproven Internet companies.

Groupon took the first step toward selling its stock on Wall Street by filing its IPO papers Wednesday with the Securities and Exchange Commission. The much-anticipated filing comes just two weeks after LinkedIn Corp., a popular Internet service for professional networking, saw its shares double in their first day of trading. That surge evoked memories of the early stages of the dot-com boom in the 1990s.

Groupon, based in Chicago, offers its subscribers the chance to purchase daily discounts targeted to their city and preferences. For example, a subscriber might pay $20 for a $40 gift certificate to a spa, restaurant, car wash or yoga studio.

The initial price of Groupon's shares and the number of shares won't be set until the company gets closer to going public. That process typically takes three to four months.

The shares probably won't be cheap, based on the confidence that Groupon showed last year when it rejected a $6 billion takeover offer from Internet search leader Google Inc. Groupon said in its filing it hopes to raise up to $750 million in the IPO, but that figure often changes as investment bankers get a better idea of the demand for the stock. The banks handling Groupon's IPO are Morgan Stanley, Goldman Sachs and Credit Suisse.

A wide variety of Internet companies are getting ready to offer their stocks to investors hoping to get rich off the next big thing. Zynga, the maker of popular Web games such as FarmVille, could be next in the IPO line, with plenty of others, such as online message service Twitter, waiting in the wings.

"The party has started," said John Fitzgibbon, founder of IPOscoop.com.

Facebook, perhaps the most anticipated Internet IPO-in-waiting, has indicated it probably won't file its IPO papers until next April, at the earliest.

Groupon's filing indicated some of the company's early investors intend to sell some of their holdings in the IPO but didn't provide further details.

Venture capitalists and other investors already have poured $1.1 billion into Groupon, a huge amount for a service founded just 2½ years ago by Andrew Mason and Eric Lefkofsky. Groupon started as a side project to another website called The Point that helped raise funds for various causes.

Mason, 30, remains Groupon's CEO and one its largest stockholders with more than 23 million shares. That puts him in line to be a billionaire, if investors like Groupon's stock as much as consumers seem to like its daily deals.

Groupon has created a new marketing phenomenon catering to people's hunger for bargains. The service has become so popular that it now offers more than 1,000 daily deals to 83 million subscribers in 43 countries, a work load handled by 7,100 employees. It's bringing in lots of money, but not enough so far to defray the costs of its rapid expansion.

Last year, Groupon lost $413 million on revenue of $713 million. By comparison, Google earned $106 million on revenue of $1.5 billion in the last full year before it went public in 2004.

Groupon, though, is growing at a much faster pace than Google was when it went public. In the first quarter of this year, Groupon's revenue rose more than 14-fold from the same time last year to $644 million. Google's revenue had tripled to $652 million in the first quarter of the year in which it went public.

Groupon's growth is "nothing short of staggering," said David Menlow, president of research company IPOfinancial.com. "Is this a pattern that has a short shelf-life?"

Both Google and Facebook are among the dozens of other companies angling to siphon revenue away from Groupon with copycat coupon services. "It's not hard to do what Groupon does," said Scott Sweet, managing partner of IPOboutique.com. He expects Groupon's brand recognition to help it stand out.

Mason signaled he intends to run Groupon as an unorthodox, fun-loving company, much like Google co-founders Larry Page and Sergey Brin did when they included a letter outlining their philosophy with that company's IPO papers.

"We want the time people spend with Groupon to be memorable," Mason wrote in his own letter. "Life is too short to be a boring company. Whether it's with a deal for something unusual, such as fire dancing classes, or a marketing campaign ... we seek to create experiences for our customers that make today different enough from yesterday to justify getting out of bed."

In another echo of Google's experimental philosophy, Mason advised prospective investors to "expect us to make ambitious bets on our future that distract us from our current business."

Groupon's IPO filing had people buzzing at the D: All Things Digital conference at the Rancho Palos Verdes resort where Mason appeared on stage Wednesday.

Although he deflected a question about when Groupon would go public, Mason said he didn't see any downside to an IPO.

"The good thing, I think, is that in this day and age, you can go public and ... people have tolerance for companies running for the long term," Mason said.

There's a good chance, though, that many investors will be looking to profit quickly from Groupon's IPO. That appears to have already happened with LinkedIn.

The shares were initially sold at $45 apiece, mostly to money managers and institutional investors, and then shot up as high as $122.70 before falling back to close at $94.25 on the first day of trading. That left LinkedIn with a market value of $9 billion, about 18 times its projected revenue this year.

That lofty appraisal and general enthusiasm for Internet IPOs has drawn comparisons to the August 1995 IPO of Web browser pioneer Netscape Communications. Its stock also doubled on the first day of trading and paved the way for hundreds of other Internet companies to go public.

"I think it's going to be rolling thunder," Chris Fralic, managing partner of venture capital fund First Round Capital, said of the current climate for Internet IPOs.

LinkedIn's performance shows the investments aren't for the faint-hearted. Although still well above the IPO price, LinkedIn shares closed Thursday at $78.63 - a two-week decline in market value of 17 percent, or about $1.5 billion.

"Obviously people who bought at the top are losing a fortune," IPOboutique.com's Sweet said. "They probably should have known better and let it settle back."

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7 Comments

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baulgur261

If they are thinking of selling the Groupon investment in Silicon Valley, they should take a look at what they offer
here.
They had a couple of restaurant deals a couple of months ago. For the last two months or so they have something wonderful like $20 worth of books for $10 at Barnes & Noble.
Not much here!! There is also much competition from existing sites. Easy to duplicate and with a given following.
Bob in Palo Alto

June 03 2011 at 4:54 PM Report abuse rate up rate down Reply
gritzsl

Groupon is business model will fail. The cost of doing business simply out does the income potential. Second the business model can be replicated by every local radio station. In my home town there are several knock off of Groupon. Sure the stock will take off immediately. Two years down the line it maybe worthless,

June 03 2011 at 2:44 PM Report abuse rate up rate down Reply
createidea

From Wikipedia: Groupon Business model

The company offers one "Groupon" ("group coupon") per day in each of the markets it serves. The Groupon works as an assurance contract using ThePoint's platform: if a certain number of people sign up for the offer, then the deal becomes available to all; if the predetermined minimum is not met, no one gets the deal that day. This reduces risk for retailers, who can treat the coupons as quantity discounts as well as sales promotion tools. Groupon makes money by keeping approximately half the money the customer pays for the coupon.

So, for example, an $80 massage could be purchased by the consumer for $40 and then Groupon and the retailer would split the $40. That is, the retailer gives a massage valued at $80 and gets approximately $20 from Groupon for it. And the consumer gets the massage, in this example, from the retailer for which they have paid $40 to Groupon.
_______________________________________________________________________________________

My question is this: Wouldn't the retailer who normally charges $80 lose approximately $60 in this case ? ....

June 03 2011 at 1:55 PM Report abuse rate up rate down Reply
ilm9p

The easiest way I've found lately to make a quick buck is to find one on the floor in the subway toilet.

June 03 2011 at 1:35 PM Report abuse rate up rate down Reply
Bert

what am I missing here . If they multiply their sales to $ 4 billion a year which is a lot and earn 10 % that is $ 400 million per year of profit . At 10 time earnings after they accomplish all these things that is a value of $ 4 billion . How do are worth the 20 billion or 50 times earnings after they achieve the speculative earnings ?

June 03 2011 at 11:20 AM Report abuse rate up rate down Reply
1 reply to Bert's comment
Master of my fate..

your not missing anything. The insiders will get the IPO stock, sell, and leave the rest of the suckers holding the bag.

June 03 2011 at 12:38 PM Report abuse rate up rate down Reply
thomasva6

stupid article if you don't tell us what the estimated price per share will be.

June 03 2011 at 10:07 AM Report abuse rate up rate down Reply