October 21, 2011, 10:27 AM

Groupon lowers its IPO goals

The daily deal operator wants to raise up to $621 million, lower than the previous $750 million.

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Groupon Inc. wants to raise up to $621 million in its initial public offering, according to a new filing with the U.S. Securities and Exchange Commission. If underwriters sell Groupon’s shares at the top of the $16 to $18 range noted in the filing, that would value the company at up to $11.4 billion.

The offer will launch on the NASDAQ exchange under the symbol GRPN.

Today’s filing represents a marked shift from June when the daily deal and online discount provider sought to raise at least $750 million and projected a market value of more than $15 billion.



Since that initial filing the daily deal leader has faced scrutiny over its large marketing expenses, unusual accounting practices, as well as its reported revenue that has led it to amend its S.E.C. documents several times.

“It’s pretty obvious that the only reason that a company would do something at a lower valuation is its bankers went out and the market receptivity was so cold they realized that there was no way they could have a successful IPO at that number,” says Forrester Research Inc. analyst Sucharita Mulpuru. “So they had to go back to the drawing board.”

However, what Groupon came up with—an IPO in which 5% of the company is offered—troubles Josef Schuster, founder of IPO research and investment house IPOX Schuster. Typically technology companies offer 25% to 30%, he says.

The daily deal provider’s small float makes it likely that more shares will appear on the market in the next few years, which could make it difficult for IPO investors to derive a profit from their investment. “This is seeking to maximize Groupon’s pre-IPO investors at the expense of the long-term IPO investor,” he says.

Groupon has long acknowledged that to achieve profitability it has to trim its marketing expenses. Today’s filing shows that it reduced its marketing expenses in the third quarter. It spent $181 million in the third quarter, compared to $432 million in the first half of the year, an average of $216 million per quarter.

Groupon's third quarter revenue increased 426% to $430.1 million from $81.8 million in the same quarter last year. It also posted a narrower quarterly loss. Groupon’s net loss in the third quarter was $10.6 million, compared with $101.2 million in the second quarter and $49.0 million during the same period a year earlier.

While that suggests a growth model that works, Mulpuru isn’t convinced. “We don’t know the elasticity of this business model once they significantly reduce their marketing expenses,” she says. “They think they can cut their marketing expenses cold turkey. But the truth is that doing so will probably cause their revenue to decline as well.”

Groupon’s main asset is its subscriber list, she says. Groupon says it had nearly 142.9 million subscribers as of Sept. 30. But the filing acknowledges that the figure is nebulous because it likely includes consumers with multiple accounts, as well as shoppers who do not receive its e-mail offers because the messages have been blocked or are otherwise undeliverable.“Only a fraction of those subscribers are actual buyers,” says Mulpuru. “Of those who are buyers, the only thing Groupon knows about them is that they buy things at half off. So how valuable is that list?”

The filing notes that subscribers have bought an average of 3.3 vouchers each since they signed up. That average number of vouchers bought by subscribers has steadily declined as Groupon has added subscribers—from 5.1 vouchers in the third quarter of 2010 and 10.3 vouchers in the same period in 2009. However, the average revenue per voucher sold has steadily increased since the second quarter of 2010. The average revenue per voucher sold was $13 in the third quarter, compared with $9.90 the same period a year earlier.

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