Issue of the week: Groupon’s next act

“How fast an Internet darling can fall,” said Michelle Conlin in the Associated Press. Just a few months ago, Groupon, the online daily deals site, was dubbed both the “Internet’s next great thing” and the fastest-growing company ever. “Investors salivated” over the prospect of an initial public offering that was expected to value the 3-year-old company at an incredible $25 billion to $30 billion. But after the stock market plunged this summer and concerns rose about the company’s accounting practices, Groupon has become a byword for what happens when a “startup experiences steroidal growth in an unproven industry.” The company will go public next week with a likely valuation of between $10.1 billion and $11.4 billion, far less than earlier estimates. Critics don’t mince words outlining Groupon’s many emerging weaknesses: “questionable accounting, an overvalued business model, and an industry that is turning into the digital equivalent of junk mail.”

Groupon’s cheerleaders missed plenty of red flags, said Andrew Ross Sorkin in The New York Times. A “series of accounting and disclosure gaffes” led the company to revise its revenues down by half this summer, stinging its credibility. Even after those damaging revelations, a “deep dive into the numbers should have raised alarm bells” that Groupon’s current model—spending big to acquire customers in a market with few barriers to entry—may not be sustainable. It makes me wonder whether underwriters have standards anymore, said Joan Lappin in Forbes.com. According to Groupon’s own IPO prospectus, the company “is out of money.” For every dollar in the bank, Groupon “owes two to others,” mostly its merchants and suppliers. It’s little wonder, then, that the company seeks a cash infusion from a public offering. Otherwise, it “will be out of business before the end of the year.”

Not likely, said Felix Salmon in Reuters.com. “There’s a real business here, with a real business model.” If Groupon can “grow at anything like its recent pace” and earn the trust of its customers, it will be “around for the foreseeable future.” Groupon is already looking much “more grown up,” said Larry Dignan in CNET.com. Over the past few months, it has “stopped spending on marketing like it was crazy” and created far “better systems and controls” to manage its surging operations. After a roller-coaster year, the biggest shock about Groupon isn’t what it will get with an IPO. It’s that the company “suddenly looks a bit like a real enterprise.”

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