The Groupon Roadshow

November 1st, 2011 - 19 Comments

When Groupon submitted financial reports in July to the Securities and Exchange Commission in advance of its initial public offering, Smeal’s Ed Ketz and his Grumpy Old Accountants co-blogger Anthony Catanach of Villanova noticed that the online coupon seller wasn’t following generally accepted accounting principles. Besides writing about it on their blog, the two professors submitted a tip to the SEC via its whistleblower program. Maybe it was a coincidence, or maybe not, but Groupon issued an amended financial report in September, and now the company has hit the road, taking its IPO case across the country (and online).

But, can the Groupon IPO be saved? That’s precisely the question that Ketz and Catanach answer today on The New York Times‘  blog Dealbook. An excerpt:

When we listen to Andrew Mason, Groupon’s chief executive, sell his powerful model of merchant and consumer value, we are left wondering whether Groupon’s “business model” is really anything more than a half-baked plan. While he makes a compelling argument for how the company delivers customer and merchant value, he is less convincing as to how Groupon will deliver value at an appropriate cost, and actually make money.

For example, Mr. Mason readily admits that low barriers to entry pose a significant challenge to Groupon’s ability to successfully execute its strategy. He acknowledges the thousands of competitors that currently deliver similar products, but calmly dismisses the issue by saying “the proof is in the numbers.” Precisely, and therein lies the problem.

You can find their complete Dealbook blog entry here.

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Jobs’ Passing Is a ‘Cultural Milestone’

October 6th, 2011 - 61 Comments

John Jordan, clinical associate professor of supply chain and information systems, reflects on the accomplishments of Steve Jobs:

The passing of Steve Jobs is a cultural milestone; his greatness is unquestioned. He was responsible for five seismic changes in the computing landscape: the original Macintosh, Pixar studios (home of “Toy Story”), the iPod, the iPhone, and the iPad. For all the justified talk of Jobs being a visionary, however, his name is on 313 different Apple patents, demonstrating an attention to detail rare in a chief executive.

Why are people bringing personal notes and tributes to Apple stores?  With Steve Wozniak, whom he treated shabbily, Jobs helped invent the personal computer. But it is only in the past decade that the computer has become truly personal, part of our daily life: iPods are in our ears, iPhones in our pockets, and iPads get read in bed. This intimacy, the quality of computing that stops being called computing, results from Jobs’ attention to design. He studied calligraphy as a teenager, and his love of typography helped defined the graphical user interface. The iPod has no screws or fasteners visible, and Apple’s signature white plastic cases are actually clear, with white backing. Even something as non-essential as the magnetic case for the iPad 2 is incredibly clever. The net result of such fastidiousness is tools that become fun to use, not alien forces to be wrestled into submission.

But such triumphs were not inevitable. Perhaps the most salient point of Jobs’ career is that his greatest moments emerged from personal failure. After the original Mac failed to sell in large numbers, Jobs was forced out of the company he co-founded. Apple drifted for more than a decade, and when he returned, Jobs’ first move was to tighten relations with Microsoft, disappointing the us-against-them crowd and, incidentally, obtaining a desperately needed cash infusion. The turnaround that followed was among the greatest success stories in the history of American business.

In part, technology had advanced to the point where Jobs’ vision could be executed: processors got fast and cool enough for slim designs. Flat-panel displays replaced bulky CRT monitors. Miniaturization of components, increased storage density, and ubiquitous wi-fi made the hand-held computer known as the iPhone possible. But Apple was never only about the technology, it was about human imagination and aspiration. When Jobs talked about “insanely great,” he referred both to the hardware and to the people at the company responsible for it.  He will be remembered as an icon alongside Henry Ford, a man largely responsible for the dawn of an era.

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Daily Financial Reports

August 31st, 2011 - 41 Comments

“In an age of lightning-fast stock trades and instant communications, yearly and quarterly financial reports seem stuck on an industrial-era pace that some say was obsolete decades ago,” Reuters reports. “Accounting experts have long called for a move to real-time, online reports in lieu of quarterly earnings statements that investors now use to decide whether to buy stocks.”

Well, not all accounting experts. Smeal’s own J. Edward Ketz and his colleague Anthony Catanach of Villanova University have serious doubts that society would be better off with this constant barrage of financials. They covered the topic recently on their blog, Grumpy Old Accountants:

Even if one could produce daily financial statements, there remains the problem of comparability.  It is hard enough now to compare quarterly statements of different firms whose seasonal effects vary, but now let’s try to compare daily financial statements of CBS with Ford.  This is nonsense.  Even restricting such analysis to firms in the same industry will not guarantee comparability as there is too much daily variability.

Let’s now consider auditing this “moment-by-moment” report generating machine.  It isn’t clear to us that the reports are auditable, except for the cash flows.  Worse, how does a business concern construct viable internal controls to handle the transactions and events in such an environment?  Given the pitiful state of some firms’ internal control systems, the extra strain would make a mockery of the audit process.

Having the technical skills and the technical machinery to allow daily or hourly financial reports is not sufficient for enabling continuous financial statements.  No, either the accounting reports become dumbed-down or we toss accrual accounting out of the window.  And audit firms have too much trouble auditing corporations now—witness the scores of restatements and accounting scandals—that they would have no chance of ever doing it right in a continuous reporting environment.

We pity the SEC if this day ever comes.

There’s more on their blog.

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Technology and Unemployment

August 24th, 2011 - 24 Comments

Speaking at a town hall meeting last week in Illinois, President Obama said that one of the challenges of creating jobs in our economy is that businesses have used technology to become incredibly efficient, thus reducing their need for employees.

“When was the last time somebody went to a bank teller instead of using the ATM, or used a travel agent instead of just going online?” the president asked. “A lot of jobs that used to be out there requiring people now have become automated.”

“Have they really?” asks Smeal’s John Jordan in the latest edition of his e-newsletter and blog, Early Indications:

The impact on the unemployment rate of information technology and its concomitant automation is not at all clear. The effect is highly variable across different countries, for example. Looking domestically, travel agents were never a major job category: Even if such jobs were automated away as the number of agencies dropped by about two-thirds in the decade-plus after 1998, such numbers pale alongside construction, manufacturing, and, I would wager, computer programmers whose positions were offshored.

The unfortunate thing in the entire discussion, apart from people without jobs obviously, is the lack of political and popular understanding of both the sources of the unemployment and the necessary solutions. Merely saying “education” or “job retraining” defers rather than settles the debate about what actually is to be done in the face of the structural transformation we are living through. On that aspect, the president is assuredly correct: He has the terminology correct, but structural changes need to be addressed with fundamental rethinking of rules and behaviors rather than with sound bites and band-aids.

Jordan offers more detailed commentary and analysis in the August edition of Early Indications.

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Debt Ceiling Fears and Reality

July 28th, 2011 - 46 Comments

Smeal’s Ed Ketz and co-blogger Anthony Catanach weigh in on their blog on the threats and rhetoric swirling in the debt ceiling debate. In particular, they question the August 2 deadline and President Obama’s assertion that Social Security payments may be delayed:

First, Geithner’s August 2 date is artificial.  We see this in part because he set one date and then he switched to a later date, seemingly to give his side more heft in the debate.  The problem with either date is that the U.S. government has almost $2 trillion in discretionary spending.  As discretionary means “optional, not obligatory, non-compulsory,” if no agreement is achieved by August 2, the Obama administration will not have to default on its bills.  Instead, it can reduce the discretionary spending, just as ordinary families with strained budgets may have to forego eating out or going to the theater.  Indeed, if the Treasury Department defaults, it will be due to a political calculation and a stubborn unwillingness to reduce discretionary spending.

President Obama recently stated that Social Security checks might not be sent out in August if the debt ceiling is not raised.  This Social Security scare is artificial and part of the political rhetoric.  Again, there is almost $2 trillion in discretionary spending and the White House merely needs to decide which things get paid and which things are delayed.  We assume he thinks Social Security is a priority.

There’s more on their blog, Grumpy Old Accountants.

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Smeal’s Liechty Testifies Before Congress

July 21st, 2011 - 17 Comments

Smeal’s John Liechty testified before the U.S. House Committee on Financial Services, Subcommittee on Oversight and Investigations, last week regarding the newly formed federal Office of Financial Research (OFR). The OFR, which was formed last year with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is charged with collecting data on the financial system to allow another government entity, the Financial Services Oversight Council, to effectively monitor its stability and ward off potential threats. The agency is the brainchild of Liechty, who spent 18 months gathering industry support and meeting with members of Congress to push its establishment.

According to The Hill‘s On the Money blog, the banking subcommittee wanted to learn “how the new Office of Financial Research plans to keep mounds of financial data safe from hackers. … With hackers always looming over the horizon, Republicans want to know what the office—which they charge lacks proper congressional oversight—is doing to keep that information in the right hands.”

In his prepared testimony, Liechty explained the origins of the OFR and why he believes its a necessary component to the country’s financial security. He opened with an outline of his three main points:

Financial stability requires transparency – The ability for regulators to both see through the counterparty network and the ability to see through asset backed, financial products to the underlying assets is an important fundamental component that is needed in order to be able to monitor the stability of the financial system. Transparency will require universally accepted identifiers and reporting standards—in essence it will require banks to get their back-offices in order. The investments required to improve transparency will not only result in improved macro-prudential regulation; they will result in improved risk management and substantial operational savings for the industry.

We face a significant scientific task – Not only do we not have the data in place, we have not done the science needed to understand system-wide risks to the financial system. In many ways, financial regulators are like the weather services, before the National Oceanic and Atmospheric Administration (NOAA) was established. NOAA was given the mandate to i) collect new data, ii) develop new models for identifying extreme events and improving weather forecasts, and iii) conduct the science necessary to understand the weather systems and build these next generation models. The Financial Services Oversight Council (FSOC) and the Office of Financial Research face similar challenges and have been given a similar mandate.

We cannot afford to fail – We live in a leveraged economy where the resilience and growth potential of the economy depends on having both an innovative and stable financial system. Innovation often leads to instability, unless the appropriate infrastructure is in place to provide stability. The FSOC and OFR offer a way forward to build this infrastructure. The risk that we live with, if we fail to have the proper oversight to provide a stable system, is not just the devastating economic impact that would come from another financial crisis of the magnitude of the 2008 crisis, but more importantly the political reality that will follow. If we can’t get this right and there is another crisis, then there is a very real risk that the political response may result in a response that adversly affects the finanical market’s ability to innovate.

You can view the entire hearing on the House banking committee’s website. For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.

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Groupon IPO

July 13th, 2011 - 21 Comments

“Facebook, Groupon and Zynga are creating an investor frenzy around high-growth Internet companies while commanding sky-rocketing valuations. But are the valuations for these pre-IPO companies justified?” asks TheStreet.com. At least in the case of Groupon, Smeal’s Ed Ketz says, “No.”

On their blog, Grumpy Old Accountants, Ketz and Anthony H. Catanach Jr., associate professor of business at Villanova University, take a look Groupon’s S-1 filing with the Securities and Exchange Commission and conclude that they would rather buy lottery tickets than participate in its IPO:

Let’s begin with the income statement.  Sales exploded from $30 (all account balances are in millions of dollars) in 2009 to $713 in 2010, an almost unheard of 23-fold growth.  Unfortunately, expenses had an even greater astronomical growth, going from $37 in 2009 to $1,170 in 2010 for net losses of $(7) and $(456), respectively.  The biggest expense accretion resides in acquisition-related expenses of $203; however, even if we remove this item from consideration, expenses are still $967 and they still swamp revenues.  Persistent earnings are clearly negative and serve as one huge red flag.

The balance sheet also displays repugnance.  Current assets are $174 while current liabilities equal $370.  Any business sophomore knows that isn’t good.  Total assets equal $382 and total liabilities $372, so total stockholders’ equity is a mere $10.  Having only 3% equity isn’t good for banks, much less anybody else; the financial leverage risk is huge.

There’s more, too. Read on on Grumpy Old Accountants.

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State of the Real Estate Market

June 7th, 2011 - 22 Comments

On the blog of the Pennsylvania Association of Realtors, Smeal’s Austin Jaffe highlights a report from the Lincoln Institute of Land Policy that summarizes recent trends in the housing market. Jaffe pulls out five lessons from the report on the state of the housing market:

1. We are unlikely to see a repeat of the housing price boom and bust again anytime soon.

2. Changes in the mortgage finance industry helped brew the unanticipated collapse.

3. Housing starts, building permits, and the home building industry will take years to recover to reach their pre-bust levels.

4. Mortgage foreclosures may be slowing but there will be a surplus of foreclosed properties in many markets for some time to come.

5. Regulatory reform may help future housing markets (or it might not!) but the forces in the economy and demographics will provide important signals for future trends.

View Jaffe’s complete blog entry on PAR’s Just Listed blog for his complete analysis.

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Smeal’s Liechty on Marketplace

May 20th, 2011 - 14 Comments

Public radio’s Marketplace last night reported on the federal Office of Financial Research, a new financial watchdog dreamed up by Smeal’s own John Liechty and put into place with that passage of the Dodd-Frank financial reform law. The Marketplace report, which tells the story of how Liechty came up with the idea for the oversight agency, is online here.

For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.

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Global Tectonics

May 11th, 2011 - 17 Comments

Smeal’s Fariborz Ghadar, director of the Center for Global Business Studies, was recently interviewed by Voice of America television regarding his book Global Tectonics: What Every Business Needs to Know. The book identifies twelve global trends that will present the most formidable challenges to world business leaders in the next 30 years.

View his interview online here.

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