Groupon, the deal-of-the-day coupon company, went public in November 2011 at $20 a share. The stock is now trading below $13 – and the pressure will be ratcheted up in June when a lockup of employees and insiders will expire, allowing them to sell. Before that, investors will be closely monitoring the company’s first quarter earnings. The quality and amount of those earnings may determine whether 31-year-old founder and CEO, George Mason, keeps his job.
Groupons’s stock has taken a hit primarily because it announced on March 30 that it had to lower its fourth quarter results due to higher-than-expected refunds and the discovery of a material weakness in its financial controls. This was particularly disconcerting to investors because the company already fought a lengthy battle with the U.S. Securities and Exchange Commission (SEC) during its IPO preparation that caused it to revise its financial results before the public offering. For a company to have to restate its results so soon after the IPO process, in which its financials are highly scrutinized, was very unusual.
The SEC has opened a preliminary investigation into Groupon’s accounting, and shareholder lawsuits are in progress.
Of course, institutional investors who passed up the IPO may now take a new look at the company and declare a buying opportunity. But on the other hand, they may be diverted by the pending Facebook IPO. If the stock continues to slide, Groupon may find itself a takeover target before long. One potential buyer is Google, which tried to buy it in late 2010.
Why is all of this pertinent to other tech companies that might issue IPOs in the near future?
That problems surfaced so soon after the Groupon IPO process could cause investors to get a more realistic handle on earnings potential before paying sky-high multiples for Internet companies. These companies can be extremely difficult to value because they are still developing and do not have a proven revenue stream. Furthermore, their business models are often still morphing during the IPO process, and may change dramatically in a short period of time.
As investors assess the new JOBS Act, which will allow companies to go public with less disclosure and private resolution of issues such as Groupon’s accounting, they might become even more wary. Investing in young, unproven companies is inherently risky, and may be seen to be even more so as those companies are allowed to work behind closed doors with regulators.
For tech companies considering a public offering, it is now even more important to ensure total preparedness for the brighter lights and harsher scrutiny their business models will endure. At a time when investors are more likely to temper their enthusiasm with a healthy dose of skepticism, “trust me” is no longer an adequate strategy.
Kathleen Wailes is a Senior Vice President at Levick Strategic Communication, the nation’s top crisis firm. She is also a contributing author to Bulletproof Blog™.