Groupon Is Back on the IPO Track to Hit the Cash Trough

Just over a week ago, Groupon put its IPO on hold, ostensibly because of market volatility in Europe. Guess the continent got a makeover, as the company's quest for an IPO is apparently on again, according to the NYT. Groupon is apparently aiming for a late-October or early November date, with an investor road show to start as early as the middle of next month.

Of course, there hasn't been a sudden cure for the thrashings of European markets. Groupon's change has more to do with calming the SEC after the memo from CEO Andrew Mason that attacked critics of the company "happened" to slip into media hands. Still, other companies are being more cautious, so why does this one continue to march on to a rendezvous with Halloween? Simple: it really needs the cash.

Open memo, insert foot
Mason's memo was destined to hit the press if for no other reason than he sent it to all Groupon employees. Anyone experienced in business would have expected copies to appear in reporters' inboxes and become public. That's why so many assume that it was an attempt to get around SEC quiet period regulations.

It's not the first time that a company had to postpone an IPO for a bit because a CEO said something during a quiet period that jumped the gun or looked like stock-pumping based on information that didn't appear in public filings.

Salesforce.com (CRM) had a similar issue when CEO Marc Benioff was interviewed by the New York Times. The same year, Google (GOOG) had a similar problem when its founders gave an interview to Playboy.

Will a treat for Groupon be a trick for investors?
If market turmoil was really the problem, then Groupon might follow Facebook's example and plan an IPO for next year. (Dueling news reports have the company eyeing either the first or second half of 2012.)

But there's a big difference between the two companies. According to reports, Facebook has been profitable with a positive cash flow. Groupon? Uh, not so much.

It has lost money quarter after quarter and cash is relatively low. As of June 30, Groupon had $225 million in cash. However, it had a working capital deficit of nearly $305 million, so its current liabilities far exceeded its current assets. That could be why Mason wrote that Groupon was already reducing its marketing budget, which is one of the big costs for the company.

Cash in the bank for now
Mason also wrote that he "laughed" when he saw a story with the headline, The Fall of Groupon: Is the Daily Deals Site Running Out of Cash?:

If you apply the same logic used in the article, you'd have concluded long ago that companies like Amazon and Wal-Mart were running out of cash too. Both have often had payables far in excess of their cash. Finance geeks call this a working capital deficit. It's normal, manageable and a lot of folks actually believe it's good thing and would kill to get paid from their customers long before they have to pay their suppliers. We are generating cash, not losing it -- we generated $25M in cash last quarter alone, adding to the $200M we had before. In other words, we're doing the opposite of running out of money.

There is some truth to that. Wal-Mart had a $9.2 billion working capital deficit on July 31, 2011. But that was on six-month revenue of $212 billion, so the deficit was 4 percent in a company that is relentlessly profitable. Amazon had working capital of $1.1 billion on June 30, 2011 with six month revenue of $19.7 billion (and regular profits), or 5.6 percent.

Groupon had six month revenue of $1.5 billion, so the working capital deficit represented more than 20 percent of revenue. Hardly in the same category, and the company has steadily lost money, which burns through the cash it generates as well as what remains of the money it raised from investors. And as far as getting paid by customers and taking time to pay vendors, that works for a Wal-Mart or Amazon because many of their vendors consider them indispensable to reaching the public. Groupon isn't close to that sort of stature.

Eventually, the company has to borrow, make a profit, or raise money to keep the business a going concern. And as a profit doesn't seem to be in the near works and investors want to cash out, the best answer is probably raising money in the capital markets -- an IPO.

Related:

• Volatility in Management, not Markets, Gets Groupon to Hold Its IPO
• Wait a Second -- Facebook Actually Missed Its Revenue Projections by $500M
• Groupon Might Be Fine, If Only Its Customers Weren't Burning Out
• What Groupon's CEO Didn't Tell His Employees in That Memo
• Groupon Tries to Make the SEC Happy, but Loses More Than Ever

Image: Flickr user CS_McMahon, CC 2.0. Erik Sherman

Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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