The Undisputed 'Flop' Investment

Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Groupon's (NASDAQ: GRPN) shares slid nearly 9% on Friday, following the board's decision to keep CEO Andrew Mason at the helm. Shareholders clearly don't like this man, and I am not the only one saying this. Earlier last week, Mason said, "If I ever thought I wasn't the right guy for the job, I'd be the first person to fire myself." The stock saw a lift that day when markets speculated that he'd go--but sadly for the shareholders, he didn't. The stock, which IPO-ed only last year, is down more than 85% from its post-IPO high of $26. Turns out it has been an even bigger disaster than the beleaguered Facebook.

So, despite the markets clearly despising Mason, why wasn't he let go? Maybe the board members thought he deserves to stay? He does come with that founder badge, after all. But that reason is debatable. Needless to say, shareholders don't care about what's fair; they care about what generates more dollars. Mason is not profitable for the company. He may be young, enthusiastic, and innovative, but he has no prior CEO experience. When you want to play the Wall Street, you bring in an expert. I'm not against Mason; after all, the company needs somebody at the top who works for maximizing shareholder wealth, not maximizing his mentor's wealth.

That's right--it seems like Groupon Chairman and Co-funder Eric Lefkofsky (co-funder, not co-founder, as he's mostly referred to) wants his decade-old association with Andrew Mason to last a little longer than shareholders expected. Mason has worked with Lefkofsky before the Groupon venture. Lefkofsky was also the first person to finance Mason's brainchild with a million dollars of his own, and to this day reaps plenty of returns on his investment.

When the Chairman holds conflicting interests, when the Chairman and CEO share close alliance, when there's little monitoring oversight from the board on its executives, and when executives are given undue extensions and extensive perquisitises, shareholders are bound to suffer. Funny how Groupon has all these attributes, making it a classic example of a corporate governance failure.

Also, the media airtime that Groupon was given shares a striking resemblance with Facebook. Much like Facebook, whose IPO was touted as the biggest IPO of the century, Groupon was touted as the fasting growing company in the world. Both eroded billions of dollars of investor money off the market within days. This also raises questions regarding the credibility of their Wall Street underwriters--JP Morgan, Morgan Stanley, Goldman Sachs and Credit Suisse, amongst others, who are actually rarely questioned.

Competitively, Groupon dwells in an indsutry that's saturating fast. We now have all the bigwigs coming in with their own Groupon-style business lines--Amazon's (NASDAQ: AMZN) Living Social, Google's (NASDAQ: GOOG) Offers, and eBay's Lifestyle Deals, to name a few. Two years ago when Groupon was at its peak, Mason said, "We want to do for local e-commerce what Amazon did for normal consumer goods."For Groupon to take Amazon's place, Amazon has to be no more, or at least reduced to insignificance. The two can't cohabitate, and we'll have to agree that Amazon is here to stay, at least in the foreseeable future.

That puts Groupon in a disadvantaged position compared to Amazon's Living Social, which competes with Groupon on the same line of business but is now acknowledging the inconsistencies in the model, and thus laying off a part of its workforce and cutting down on expenses. Likewise Google, with its search engine power, implicitly controls web traffic. The search engine giant would rather benefit itself than its competitor. Similarly, Groupon's notorious discord with its merchants for charging 50% cuts in daily deals and being the source of negative reviews for these businesses on local review sites gives eBay an edge over it.

In a nut shell, today's price of $4.20 and the current outstanding number of shares value Groupon at a little less than $3 billion, which is less than half of what Google offered in its acquisition offer two years ago, when Groupon's management was too consumed with overconfidence about their business model. Result? Groupon has returned a net loss in three out of the four quarters since its IPO. The company's third quarter results missed analyst forecasts and management also lowered their future guidance. GRPN has 17.52% of its outstanding float short and has seen an increase of 20.72% in its short acitivty within the last month.


PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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