
Groupon stock sinks to new low, investors sue - joejohnson
http://www.chicagobusiness.com/article/20120404/NEWS08/120409912/groupon-stock-sinks-to-new-low
======
guptaneil
As a Silicon Valley native currently living in Chicago, I've always found it
disappointing that Groupon is the poster child of innovation and
entrepreneurship in Chicago. They seem to lack a solid business plan and have
a history of deliberately misleading investors and businesses. Far more
impressive companies, such as 37signals or GrubHub, are based here that
deserve that kind of attention instead.

I very much doubt the legitimacy of this story, but I was in a barbershop a
few weeks ago, where the owner told me about one of the Groupon executives who
was in the shop earlier. He was saying we shouldn't expect Groupon to be
around in 10 years because the company's plan is to collect as much cash as
possible, fire everybody, and shut down, keeping the money for the investors.
While I doubt a Groupon executive would have actually said that in a
barbershop, I can believe that actually was their long-term plan, but if
things keep up at their current rate, I'm not sure if Groupon will even last
that long.

~~~
pbreit
> I was in a barbershop a few weeks ago, where the owner told me about one of
> the Groupon executives who was in the shop earlier

Great source!

~~~
tptacek
I don't know why this was downmodded. It's trenchant. Nobody on HN seems to
like Groupon, but that doesn't make this kind of ridiculous hearsay more
valid.

~~~
furyofantares
I'd guess it's due to the sarcastic tone. If he had your made your post
instead I think it would be faring better.

What really gets me is the barbershop post actually admits that it's very
unlikely for the source to be telling the truth, then goes on to give it
credit anyway because it agrees with his own speculation.

~~~
larrys
"He was saying we shouldn't expect Groupon to be around in 10 years because
the company's plan is to collect as much cash as possible, fire everybody, and
shut down, keeping the money for the investors."

Because the problem isn't the source (the barber). It's the idea that a
groupon executive would have said something like this to his barber,
physician, plumber etc.

Maybe bragging to his call girl, maybe to a friend when drunk (and was
overheard) but it's ridiculous to think someone would say something like this
even in jest.

------
Quizzy
They should have unloaded this fraud on Google when there was a $6 billion
cash offer sitting on the table (assuming that was true).

The fact that Google even offered that much leads me to believe that they have
jumped the shark with that offer.

Anybody who knows anything about retail would have studied the business model
and realized that this was not sustainable. Obvious red flags: 1\. Heavy
reliance on field sales (the largest expense), which is NOT scalable 2\.
Exclusive reliance on repeat sales as the key driver of sustainability: this
being the obvious case, did Google not do its due diligence and actually
surveyed past Groupon customers? Such a siimple survey would have easily
revealed the issues of this "local deals" model. 3\. Heavy reliance on "small
business" owners as the driver of revenue. This is a sensitive and fickle
market, where even slight movements in the general economy will cause huge
moves in spending patterns.

These 3 points were readily available to anybody with some insight into this
segment; Google with all its money must be surrounded by "yes" men, nothing
else could explain it's willingness to part with $6 billion so quickly.

~~~
nakor
I'm not sure if they actually could have sold the company to google even if
they wanted to. My understanding is that you must open your books to the
prospective buyer after a certain stage and it is likely that once the google
accountants had a look at Groupons books the deal would have fallen through.

That could have created negative press and damaged their pump-and-dump
strategy for the IPO.

~~~
Quizzy
Excellent point.

------
tptacek
My perception is that these kinds of shareholder suits are trivial to file,
and that they occur regularly any time the stock of any public company drops
significantly after some event about them hits the news.

It would be interesting to see someone chart this.

(No comment about Groupon's long-term viability is being implied here).

~~~
bhousel
As someone who builds legal matter management software for large publicly
traded companies, I can confirm that your perception is correct.

Public companies are sued all the time for this kind of stuff. These lawsuits
often allege misrepresentation in a company's SEC filings.

------
victork2
Who would have imagined that groupon had a future? It worked on the novelty
effect and it was doomed to fail.

On the other hand, Chicago business is full of bugs. Ghostery block 13 (!)
calls to different websites such as: Quantcast, 24/7 real media, Outbrain
etc... I won't visit this website again. I wish I was warned of that before
hand not when I go to the website, I value my privacy more than going there.

~~~
zaidf
_It worked on the novelty effect and it was doomed to fail._

A little premature to write an obituary of a company that finished 2011 with
1.6B in revenue.

~~~
ohashi
1.6B in revenue is pretty meaningless if you're not even making a profit. They
are simply really good at losing a lot of money.

~~~
zaidf
It's "scary" and "even" dangerous one may say, but _not_ meaningless.

~~~
ohashi
You are correct, it's not meaningless, I should have said: Simply having
revenue isn't a defense for a company if they are spending more money than
they are bringing in.

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snorkel
Who would guess that there could be an integrity issue with a company that
tried to invent new accounting rules where marketing costs don't appear on the
balance sheet? You'd have a crystal ball or a brain to see this coming.

~~~
lubos
Marketing costs are not supposed to appear on balance sheet.

I don't really watch this company but if I remember correctly, their way of
doing accounting was to show all received money from customers as income
instead of liabilities since they were collecting half of it on behalf of
vendors.

They were simply inflating their revenue but it's not like it matters, because
profit (loss) would be always the same regardless.

------
bfrog
Please. As if anyone with half a brain couldn't see this ponzi scheme on the
blowup train of doom. Who are these magical investors?

~~~
dantheman
It's not a ponzi scheme.

~~~
jasonrr
Simply stating it is not a ponzi scheme doesn't advance the conversation in a
meaningful way in my opinion.

It's really just semantics at this point. There is a lot of evidence here that
suggests systematic misleading (if not out-right defrauding) of investors. So
you while you are technically correct, I think what Groupon has done is in the
spirit of Ponzi even if it is executed differently. What's happened here is
more than just a bad business plan executed honestly producing poor results.
Just because we don't have the exact word for it doesn't make it any more
ethical.

~~~
Quizzy
Jason, your gut instinct is correct. Groupon is a Ponzi scheme in every way:
last customer in gets no money out. I feel sorry for that Mom & Pop pizza that
paid $1,000 to run a Groupon deal, and expecting $300 back in 60 days, only to
see Groupon go belly up and get nothing but a letter that says "Please send
your creditor claim to the bankruptcy trustee listed below".

------
fasteddie31003
People I know who currently work for Groupon say that the culture there is
falling apart. To get the numbers investors expect the sales people need to
reach unrealistic sales numbers. Management is grasping at straws, trying
every trick in the book to not let the whole thing fall apart. The Groupon
model is simply not sustainable, it was a onetime gimmick.

As someone who lives in Chicago, I am worried about its failure and with that
the future of the tech scene in Chicago.

~~~
timjahn
Groupon is a large part of the tech scene here in Chicago, contributing a lot
to the scene.

But they're not our sole pillar any more. I think we all know that pillar is
going to come crashing down in the near future, and we're ready.

Groupon helped propel us to where we are, and we're standing on our own now.
In my opinion, the future of tech in Chicago will not solely depend on
Groupon's activity.

~~~
tedkalaw
I chatted with some engineers from BrainTree and I was impressed at their
commitment to helping build the tech scene in Chicago.

It's an exciting time.

------
diogenescynic
They should be going after the SEC for allowing this company to IPO in the
first place. Going public used to be a privilege, now it seems too easy.

~~~
wmil
Since SOX successful tech companies have been avoiding going public for as
long as possible (ie Google, Facebook).

I wonder if there was some pressure from investment bankers who want to
encourage more IPOs as well as government types who want the law to seen as a
success.

------
edw519
_The first two shareholder lawsuits were filed Tuesday in federal court in
Chicago after the markets closed, seeking class-action status for people who
bought stock before the company restated fourth-quarter financial results on
Friday._

Perhaps those people should have been reading Hacker News:

[http://www.hnsearch.com/search#request/all&q=groupon&...](http://www.hnsearch.com/search#request/all&q=groupon&sortby=points+desc)

(The first post is rather long and fairly neutral, but check out some of the
posts (and their dates) right after that.)

~~~
tucson
Thanks for the link. What I find troubling is to read so many articles
pointing to shady business practices from Groupon and bubble valuation, and
still the SEC lets the IPO go through and investors lose their money - that
part did not happen yet but it seems written on the wall.

~~~
radioact1ve
Could the SEC really do that? Just outright stop an IPO?

------
api
I remember hearing about how this company ran, and figuring it was nothing but
a giant boiler room sales pit and a gimmick. I am not surprised.

~~~
Quizzy
Anecdotally, the first generation of sales rep have nothing but depressing
things to say about this entire market segment now. The first year sales
numbers were gangbusters, until their clients called back complaining,
swearing never to do another Groupon deal, ever again.

It's not just Groupon, this entire business model is unsustainable: asking a
retailer to discount his products for a fee in the hopes that he will attract
new "local deal" customers willing to pay full retail next time, when the ONLY
reason these customers came in the first place was because of the discount.

~~~
notJim
Not only that, but I suspect that people who _are_ loyal to businesses and
like interacting with local business owners are less likely to use sites like
groupon, because they know that the businesses often get screwed, and because
they don't want to be thought of as bargain-shoppers.

~~~
muraiki
A friend sent me a Groupon for a local bakery. It was something ridiculous
like $20 worth of food for $10. Since I had heard about the bad relationships
between businesses and Groupon, and since I actually like this little store, I
declined to get the Groupon. I'd rather pay full price to support a local
business!

------
walru
GRPN was a always a short sellers dream come true. Next up, ZNGA.

~~~
untog
Why do you say Zynga? It was my understanding that their financials are a good
bit more stable, even if they are Facebook-dependent.

~~~
Quizzy
Zynga's business model is like any other gaming publisher (such as EA,
Blizzard, etc.). To succeed in gaming you MUST have a pipeline of games that
continue revenue growth. If you cannot create your own, then you must acquire
indie developers (OMGPOP recently). In time Zynga stock will be no different
than any other gaming publisher stock. Look at Blizzard: other than Diablo,
Starcraft and WoW, it has created nothing in the last 4 years beyond sequels.
Homegrown innovation is nearly impossible.

Rovio was in the business for 5 years before Angry Birds, and I doubt they'll
have another hit like Angry Birds ever again.

Id fell apart when it couldn't come up with something better than the Doom
franchise.

OMGPOP was very smart to sell out to Zynga, because there is no way it would
have come up with something even close to Draw Something in another 5 years.

Unlike rock stars and pop singers, creating a string of gaming hits is so much
harder because it requires the perfect storm of so many variables each and
every time, whereas a single person like Adele, Amy Winehouse, etc. can rely
on their genius alone to create a hit.

~~~
trimbo
> Id fell apart when it couldn't come up with something better than the Doom
> franchise.

Except for, you know... Quake.

On your other point. The difference between Zynga and EA is that Zynga's games
have a huge turnover rate and a very low percentage of paying customers. EA's
games -- at least most of their games -- have 100% paying customers and have a
large _returning_ customer rate year after year (Madden 11, Madden 12, Madden
13, Fifa 11, Fifa 12...).

So in other words, Zynga's business model is completely different than EA's.

------
crag
And this is what happens when inventors invest in a company they know noting
about. This is what happens when you listen to the hype, and the street and
NOT do your own due diligence. There's a reason why the big banks backed the
IPO but didn't take a percentage.

When it all comes down in flames, (I think it's already begun - if you haven't
gotten out, get out now) the only saving grace is that the CEO and board will
be embattled in court for years. The investors might get a few pennies on the
dollar.

~~~
ironchef
"There's a reason why the big banks backed the IPO but didn't take a
percentage." Morgan stanley has 19 mil shares. Goldman has 2 mil shares. They
backed the IPO and took a percentage. Am i misunderstanding your statement?

~~~
antr
they didn't invest cash, they just exercised their green-shoe.

~~~
crag
Exactly. They never invested cash. It's all vapor. In other words, both banks
lose nothing except the promise of future profits.

Both banks already made their money (and then some) on the IPO and associated
fees. Now of course, assuming the banks had no knowledge of Groupon's true
financial health; they did nothing illegal.

BUT ethically, brokers/traders have a responsibility to informed their clients
when it's time to cash out. A lot of people made money off this deal. And lot
didn't.

But Groupon, if what I'm hearing is true, is committing fraud. I mean, my god,
are they cooking the books? Sort of reminds me of Enron. But only time (and
many lawsuits later) will tell.

------
unohoo
The problem with Groupon and other local deal companies is that they have to
manage fluctuations on both the consumer as well as the merchant side. Even if
one side of the equation wobbles a little, Groupon will feel the impact. I
think at this stage, Groupon is fighting a dual (losing) battle:

1) Merchants perception of the whole daily deal market is very negative.
Repeat business is quite low and it mainly attracts the spendthrifts who are
looking for a deal. Given the margins that most local businesses have, running
a daily deal means taking a hit on those margins.

2) From a consumer perspective, the novelty of the daily deals market has
really worn off. Consumer fatigue has set in and more and more people are
tired of having their inboxes flooded with emails. Personalization is still a
joke and ticks people off even further.

It wont be long before the whole local deal market implodes (think of it --
the 2nd largest player - LivingSocial is not yet profitable). Groupon is well
aware of this and so is trying to ramp up its technology platform via
acquisitions to eventually evolve into something more. Its just a matter of
time that the whole thing comes crashing down.

~~~
MatthewPhillips
The local deals is analogous to department store clearance sales. Retailers
have perfected the art of the sale and they know that clearance sales are a
different animal. If someone comes into you store and heads straight to
clearance they can't be upsold. Don't waste your time on them.

This is different from your event sale, which _are_ an excellent way to gain
repeated customers (and upsell them). There is a future for local deal sites
but it needs a different hook with customers.

------
ssharp
I think there are so many ways technology can help mom + pop type small
businesses inexpensively stay competitive with the numerous forces working
against them (including retail giants with substantially better technology),
and the huge interest in daily deals justifies this assertion--at least in
some small way.

But the technology needs to help the small business actually improve. Groupon
doesn't do this. For the most part, it plays smoke and mirrors with revenues
and the costs or profits are not entirely known because the small business
cannot measure them.

------
smoody
A TV network is going to Pilot with a new fictional sitcom -- called "Friend
Me" I believe. It's about a man who packs-up and moves so he can work at
Groupon (not made-up). Perhaps making it a comedy isn't such a good idea. ;-)

------
mleatherb
It seems like everyone and their mother are trying for IPO. If the rumor about
an offer from google was true, they should have taken the money and ran

~~~
taphangum
I'm starting to think that it was google who ran away from this deal.

------
nateberkopec
So it's official - Groupon is this bubble's Pets.com.

------
silentscope
When your boss is your shareholders, the seat of your pants accounting doesn't
really cut it.

------
renatomoya
I see why some already jumped off that boat. Started pretty good but, it could
do better.

------
option_greek
I wonder how long it will be before we see Yahoo style head lines for Groupon
and RIM.

------
jacquesm
Would they have sued if they stock had gone up?

~~~
chc
I don't understand why you'd ask. How would that injure them?

------
run4yourlives
Investors sue? Really?

So basically, I want to drink the koolaid but god damn you if it makes me
sick...

You should not be allowed to sue as a method to correct your own stupidity.

~~~
zecho
I think in this case it makes sense. Groupon restated a sharp drop in their
reported revenues over three years.

People don't necessarily invest in things they think are particularly good
business models. They invest in things that are undervalued. If you looked at
the revenue/price and thought it was undervalued and then Groupon changed 3
years worth of data on your after you made a stock purchase, you'd sue too.

Just look at these reductions. They're more than just a minor correction from
Groupon:

\- For 2008, revenue was reduced to $5,000, from $94,000.

\- For 2009, revenue was reduced to $14.54 million, from $30.47 million.

\- For 2010, revenue was reduced to $312.9 million, from $713.4 million.

~~~
run4yourlives
_People don't necessarily invest in things they think are particularly good
business models._

If you can't figure out the business model generating the reported millions,
it's your own fault for thinking those millions are undervalued.

How many of these investors didn't actually care about the value of the stock,
so long as there was somebody around tomorrow that would buy it for more?

Sorry, but I have no sympathy when you willingly play the game and then get
burned by the same things you intended to inflict on someone else.

~~~
prodigal_erik
I'm not entitled to lie to investors just because they should be smart enough
to disbelieve me. There's a point beyond which it's not feasible for third
parties to know how realistic my financial statements are, so the SEC has
mandated I'm on the hook when I write them.

