Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Is Groupon the Next Enron?

Companies / Tech Stocks Apr 10, 2012 - 09:45 AM GMT

By: Money_Morning


Diamond Rated - Best Financial Markets Analysis ArticleKeith Fitz-Gerald, Chief Investment Strategist, Money Morning writes: Is Groupon the next Enron? ... No. It's worse.

Before the company even went public, there were signs that internal financial controls weren't up to snuff.

Now I'm hearing refrains of "three blind mice" as investors line up to have their day in court. You might as well say the "dog ate my homework."

It's not like no one knew this was coming.

The U.S. Securities and Exchange Commission (SEC) made management redo Groupon's financial statements and accounting practices not once, but twice before the company's January 2011 initial public offering (IPO).

The first time involved including the cost of marketing in operating income - duh. The second was to force the company to deduct merchant payments from revenues - double duh!

Both are basic accounting principles.

If you spent $2 to gain $1 in orders you have to report that as a $1 loss if you're dealing with cold, hard cash. Also, if you have $1 in merchant payments, you can't count that as $2 in revenues, unless apparently you work at Groupon and love accrual accounting.

It's not like Groupon execs can claim they didn't know.

It's abundantly clear to me that the "company" has very little, if any, understanding of REG FD and securities litigation.

(REG FD, in case you are not familiar with it, is short for Regulation Fair Disclosure which the SEC adopted Aug. 15, 2000. REG FD is intended to eliminate selective disclosure of material non-public information.)

But I have a hunch they're going to find out the hard way.

Groupon's "Material Weakness"
When the SEC came knocking again on April 2nd the company was forced to restate its Q4 financials. That summarily reduced Groupon's revenue by $14 million and profits - assuming there were any to begin with - by $22.6 million.

In an official statement, Ernst & Young, the company's primary auditor, noted "material weakness" with regard to the company's internal controls. Investors simply noted that they'd better get going while the going was good.

Groupon's share price tumbled 16.87% Monday alone and is down 55% from its peak.

Any other company would be begging major networks for air time to explain themselves. Yet Groupon execs appear to be holed up in their Chicago headquarters either in blithe ignorance of the mess they created or in deliberate avoidance of the tough questions that they would have to answer.

Speaking of tough questions, Milberg, LLP has announced a class action lawsuit on behalf of purchasers of Groupon's common stock between Nov. 4, 2011 and March 30, 2012.

And Johnson & Weaver, LLP, a San Diego-based shareholder rights law firm has announced an investigation into breaches of fiduciary duty by Groupon officers and directors.

This is the legal equivalent of saying you screwed your shareholders, your underwriters and everybody else. Folded into this is the implication that the company lied its asteroids off.

No wonder The Wall Street Journal has reported that there is a growing chorus of cries to write down the company's goodwill. And I'm not talking about the Webster's definition of "hope and intention" either.
I'm talking about the kind of accounting that formed the basis for the huge $166.9 million entry noted on Groupon's 10-k as of December 31, 2011.

Goodwill, in case you are not familiar with that definition, includes things that cannot be easily valued but which are determined by accountants to add to the value of any business over and above its actual financial assets.

Here's an example.

If you've got $10 million in stuff like equipment, buildings, and machinery and your company is valued at $100 million because you've got a cool brand, legions of hipster customers, and the Internet is hot, congratulate yourself.

You've got $90 million in goodwill that can't technically be valued but which is theoretically recognized by insiders, and investment bankers anxious to push up the value of an IPO.

As notes my good friend Ziad Abdelnour, President of Blackhawk Partners, Inc. in his book, Economic Warfare, "great wealth rarely comes from speculating and creating nothing."

I agree - yet creating something from nothing describes virtually the entire social media space at the moment, which is why I have repeatedly and very vocally discouraged investors from "buying" in.

Social media stocks are not investments; they are speculation in its purest form. If you've got the stomach for it and want to risk the money, fine. That's your decision.

But don't confuse the promise of real companies with real products, dividends and cash flow with the greater fool theory - as in some greater fool is going to come along and pay you more than you paid at an undetermined point in the future.

The vast majority of social media companies have terribly flawed business models.

Groupon's Broken Business Model
Would you pay $10,000-$50,000 for the privilege of having a customer walk through your door, buy one of your products at a loss and leave...on the assumption that he or she might become a customer again in the future?

I sure as hell wouldn't...the Yellow Pages have more staying power.

For business owners with viable going concerns, the Groupon model is fraught with risk because every Groupon coupon out there represents a potential liability that you have to honor the moment it comes waltzing through your front door.

Got a $10 hamburger and a $9 Groupon? Congratulations, you've just "made a $1" not counting your lease, your labor, your taxes, your insurance nor any other expense.


Sell a $20 carwash and a $20 Groupon gets cashed? You've just made $0 and effectively "paid" for your customer's visit. While he got a clean car out of the deal, you got to burn up resources, time and your equipment. Some trade.

Offering a special $10 deal on a $20 pair of sunglasses? You're $10 in the hole the moment you ring the register. Way to go. I hear NASA is hiring.

I've heard that Groupon agreements are very restrictive. The company can apparently run ads from competitors and yet sit on a business' specific "deal" for as long as they like while preventing any business it wants from offering advertisements or competing deals. No comment from Groupon as of press time.

What's ironic is that this business model is equally absurd for Groupon.

The company makes its money on the "float" - that's what they call the difference between when Groupon gets paid and when it has to pay its merchants.

According to Groupon's S-1, the company's "merchant arrangements are generally structured such that we collect cash up front when our customers purchase Groupons and make payments to our merchants at a subsequent date. In North America, we typically pay our merchants in installments within sixty days after the Groupon is sold."

Sixty days...that's how long Groupon can invest, sit on, use or do anything else it pleases with the money before it has to fork it over to the merchants to whom it really belongs at the end of the day.


According to Rakesh Agrawal of TechCrunch, Groupon is nothing more than a "portfolio of loans backed by the receivables of small businesses."

I think that's being generous.

If you're tempted to turn a blind eye, think for a minute about AIG, Lehman, Fannie, Freddie and half a dozen other companies that thought a portfolio of other people's debt was pretty nifty, too. Different industries, I know, but same concept at work here.

Let's say there is a run on the "bank" - in this case Groupon -- because a business fails to honor its commitment, or worse, simply fails or a customer wants his money back.

Groupon members will go to Groupon for their money rather than seek recourse from the merchant as would normally be the case.

There is a building volume of angry customers out there doing just that, and a quick search of the Internet turned up refund requests on everything from helicopter rides in Johannesburg to yoga in California.

This will quite literally strangle the company. Angry customers will pressure margins, bleed cash and increase account churn.

Fuzzy Accounting at Groupon
That means the $1.12 billion Groupon has socked away in the till according to their most recent 10-k could disappear before management's eyes. Given the way the company has handled their financial matters to date, that may be a moot point.

Why? Groupon reportedly has no way of knowing how many of the coupons it has distributed to users remain uncollected or unused in real time. Many businesses apparently still track redemptions by hand.
Again, no comment from Groupon here.

If you think reconciling your bank statement by hand is an exercise in futility, imagine doing it with $1.6 billion in total revenue spread amongst more than 115 million subscribers, only 20% of which have made an actual purchase from more than 135,247 merchants, according to All Things Digital.

So let's review.

Groupon raised nearly $700 million to give it a valuation of $12.8 billion upon its Nov. 4, 2011 IPO.

A Marketwatch article by Eric Lefkofsky published one day earlier on Nov. 3, 2011 notes that insiders and early investors have cashed out about $943 million of a $1.12 billion total raised in venture funding.

In other words, insiders cashed "84% of the entire company's venture capital round."

This is not new. In April 2010, Groupon raised $130 million in an earlier round of venture funding of which $10 million went to the company and $120 million to insiders.

See a pattern here? I thought so - me too.

The fact is Groupon went public after several well-publicized accounting problems that management evidently still thinks are no big deal.

Yet the accountants responsible for signing off are back pedaling. Lawsuit rumors are flying. An SEC probe is in the works.

Moral of the story?

Invest in any social media company at your own risk...insiders are going to get rich. Underwriters are going to get rich.

Both are selling their stock to you because you hope to get rich.

There's a big difference.

Source :

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules