Did big banks turn blind eye to Groupon's odd accounting?

The company was supposed to be valued at $30 billion when it goes public, but now, its valuation looks to be more in the $10-billion range--if it's lucky.

Don Reisinger
Don Reisinger
Former CNET contributor Don Reisinger is a technology columnist who has covered everything from HDTVs to computers to Flowbee Haircut Systems. Besides his work with CNET, Don's work has been featured in a variety of other publications including PC World and a host of Ziff-Davis publications.
4 min read

Daily-deals provider Groupon was supposed to be the star of this year's IPOs. But over the last several months, the chances of Groupon becoming a disappointment to investors have skyrocketed.

When Groupon filed its IPO papers in June, the excitement surrounding its decision was palpable. According to its filing, Groupon was planning to raise $750 million on its IPO, making it one of the largest public offerings this year. And although Groupon didn't comment on valuation, reports surfaced following its IPO filing, saying it could be valued at between $20 billion and $25 billion when it went public.

According to the New York Times, which took a behind-the-scenes look yesterday at Groupon's IPO preparations, some investment banks valued the company at $30 billion.

To many, that valuation made sense. After all, as its filing papers showed, Groupon was a giant. The company's revenue in the second quarter of 2009 was just $3.3 million. But by the end of the first quarter of this year, its papers claimed, revenue jumped to $644.7 million. And between June 2009 and March of 2011, the company's subscriber base grew from 152,000 to 83.1 million. By all measure, it appeared things were looking up for Groupon.

According to the Times, investment banks were especially excited about Groupon's prospects. The company's three underwriters, Morgan Stanley, Credit Suisse, and Goldman Sachs, all jumped at the chance to be a part of the IPO, the Times is reporting, citing sources. In fact, Goldman Sachs' CEO Lloyd Blankfein personally pushed for his company's involvement in Groupon's IPO, the Times says.

The only issue is, those companies were basing their excitement on a company that, right now, doesn't look nearly as successful as it did months ago.

The changing face of Groupon
Soon after Groupon filed its IPO papers, the Securities and Exchange Commission took an ax to its financials. The SEC found that Groupon's revenue figures were based on gross revenue the startup collected before paying merchants that were using its service--and it said that Groupon's real revenue was what it collected after paying merchants. The company was forced to revise its figures down to that level.

The company also came under fire for the huge difference between its non-GAAP (generally accepted accounting principles) income figures and GAAP income. Because of its use of an accounting system called ACSOI, or adjusted consolidated segment operating income, the firm initially only posted a loss in 2010 of $60.6 million. However, on a GAAP basis, which is widely seen as the most accurate representation of a company's financial performance, Groupon lost $413.4 million in 2010.

In its most recent amended filing from earlier this month, things haven't gotten much better for Groupon's financials. The company says now that it generated just $313 million in revenue last year and posted a loss of $390 million. In the first six months of 2011, the company has generated $688 million in revenue and a loss of nearly $204 million. That becomes all the more worrisome for Groupon when one considers that it has just $225 million in cash on-hand. Its working capital--a measure of current assets less current liabilities, or the operating liquidity of a company--is nearly $305 million in the red.

Big paydays
Things could have been better for Groupon's financial performance, though. In December and January, the company raised $946 million in cash to help bolster its business. According to its latest SEC filing, $132.4 million of that went to the company for "working capital and general corporate purposes." However, much of the rest of it was paid out to the company's executives--a huge red flag for investors. In fact, Groupon's co-founder and executive chairman, Eric Lefkosky, along with his wife, took home over $319 million of those proceeds. Former executives and directors also walked away with millions of dollars and Groupon CEO Andrew Mason took a $10 million payout.

But even with the prospect of big paydays, the company has had trouble holding on to executives. Groupon's COO, Margo Georgiadis, left the company recently to head back to Google. Georgiadis has become the second Groupon COO to leave this year, exiting after just five months in the position. Former COO Rob Solomon left the company after two months in the job.

A look ahead
So, what does all this mean for Groupon and its future investors? As the Times points out, all the excitement over the company's IPO might have been premature. In fact, the Times says, citing sources, that Groupon will be lucky to have a $10 billion valuation when it goes public. That comes just a week after the Wall Street Journal reported, citing IPO analysts, that Groupon will likely be valued between $5 billion and $10 billion.

But now the question is, when will Groupon actually go public? The company reportedly planned on a September IPO, but after the market started to turn sour, Groupon changed its plans. The Times then reported that Groupon would go public late this month or early next month, but Groupon has so far not confirmed that claim.

However, considering Groupon's financial situation, it appears the company needs to raise money sooner rather than later. And an IPO in the short-term might just be in the works.

Groupon did not immediately respond to CNET's request for comment.