Groupon Pre-IPO Valuation Speculation

There’s been a lot of discussion as to whether or not Groupon’s valuation is legitimate. There are a few ways of looking at this problem, however, the current pessimistic outlook is more-or-less irrelevant until the company actually goes public.

So what Groupon is deciding to present investors with figures that neglect expenses that are tied to their earnings? 

There is little to defend when a company is supporting financial statements that do not account for expenses. In my years as a student of finance, I cannot recall a time when a public company has ethically neglected expenses incurred on financial statements. However, Groupon is not a public company yet. So they are taking an alternative route to approaching investors.

It is not that Groupon is blind to the oddities of their recently-adopted metric. It is more likely that they are trying to offer up a realistic post-market valuation for investors, and yes, a figure that also makes their internal stakeholders feel worth more.

Talking with my Haas grad roommate yesterday about unrelated economic issues, Donald Trump’s name came up. He asked me, “do you know why Donald Trump always comes out on top?” I replied, “no, why does he?” Austin went on to tell me that when a Trump property begins to fail, Trump sinks more and more cash into it (i.e. fixing it up, hiring management, adding ammentities, etc.). Then Austin tells me the Donald’s not-so-secret secret. Once he has enough cash leveraged in the property, he takes it public. With his near-household name attached to the IPO, the valuation naturally swings to the upper end of the spectrum. And once public, Trump sells his shares.

Good strategy? The guys at Groupon may think so.

Andrew Mason – Creator of Groupon

So what they have made up their own metric to solve their problems? 

While dozens, if not hundreds, of tech IPOs have already taken place, only a handful come to mind that have made a successful showing in recent years (Ancestry, Skype, LinkedIn, RenRen, Pandora, et al). The tech sector is experiencing only its second expansion (i.e., for tech IPO valuations related to mobile/tab/web apps). Innovative models and metrics are untried and untested. When it comes down to the IPO underwriting for Groupon, it is up to the big banks to agree or not with Groupon’s numbers. Not ironically, underwriters tend to bend their perceptions to market demand. And seemingly the demand is there.

So my advice: Don’t be surprised when Groupon’s metrics are accepted.