POSNER CALLED THIS A YEAR AGO

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Amendment No. 2
to
FORM S-1REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

In December of last year, I wrote that Groupon should take a $6 billion buy-out offer from Google while the iron was hot, before people realized that, “There aren’t enough new customers, who become repeat customers, for the business to be able to recover from the loss-leader deals! And that is why Groupon is like a pyramid scheme.”  I also wrote, “The bottom line is, Groupon costs too much money per one-time new customer attraction for the business to ever recover in the long run--unless almost every new customer comes back again! If you have a 10% profit margin and are paying 50% to get a customer who might never come back, how does a business prosper? They can’t! Groupon is like three-card Monte, looks easy, can’t win.”

I based my analysis of why Groupon would implode on the fact that, like a pyramid scheme, there would not be enough merchants to continue signing up for Groupon to offer deals every day.  I should have taken the analysis a step further and pointed out that the cost of acquiring new merchant customers would become too prohibitive, as it became more difficult to convince new businesses to invest.

Groupon has been talking about launching an Initial Public Offering (IPO) and I read the company’s latest 120 page financial filing with the Securities and Exchange Commission (SEC).

SOME MATHEMATICAL FACTS

The simple bottom line for Groupon for the second half of FY 2011 is:

• Revenues: $1.5 billion
• Net revenues (after revenues are split with merchants): $611 million
• Total operating expenses: $831 million
• Total net loss after other items: $255 million

A lot of companies lose money, but Groupon is taking on a lot of debt that is due in 30 to 60 days:

• Merchant payable: $392 million (up from $162 million)
• Accounts payable: $50 million (down from $58 million
• Accrued expenses: $165 million (up from $98 million)
• Due to “related parties”: $264,000 (down from $13 million)
• Taxes owed: $13 million
• Other: $62 million
• Total : $680 million

Groupon only has $409 million in cash and assets.  That leaves the company with $271 million they have to find somewhere.  If the IPO generates $750 million, and Groupon pays its debts, the company will have $479 million left.  At first, that sounds great, but Groupon has an accumulated deficit of $650 million. If the company continues to lose money at the rate they are burning it, they will be broke again in less than a year after the IPO infusion.

All IPO registrations have to impart what risks an investor might take by investing in the company.  What Groupon has written in their registration is very reminiscent of what I predicted about the financial viability of the company a year ago!

On Page 10 of the filing Groupon writes:

Risks Related to Our Business

“We may not maintain the revenue growth that we have experienced since inception. We have experienced rapid growth over a short period in a new market that we have created and we do not know whether this market will continue to develop or whether it can be maintained. If we are unable to successfully respond to changes in the market, our business could be harmed.”

“Our business has grown rapidly as merchants and consumers have increasingly used our marketplace. However, this is a new market which we only created in late 2008 and which has operated at a substantial scale for only a limited period of time. Given the limited history, it is difficult to predict whether this market will continue to grow or whether it can be maintained. For example, as a result of our limited operating history in a new industry and because the majority of our subscribers registered for our service or made their initial purchase of a Groupon in the past 12 months, it is difficult to discern meaningful or established trends with respect to the purchase activity of our subscribers or customers. We expect that the market will evolve in ways which may be difficult to predict. For example, we anticipate that over time we will reach a point in most markets where we have achieved a market penetration such that investments in new subscriber acquisition are less productive and the continued growth of our gross profit will require more focus on increasing the rate at which our existing subscribers purchase Groupons. It is also possible that merchants or customers could broadly determine that they no longer believe in the value of our current services or marketplace. In the event of these or any other changes to the market, our continued success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics.”

Groupon called it “achieving market penetration.”   I wrote that there would not be enough new customers to sustain growth.  Potato, potatoe or  tomato, tomatoe, I got it right first!