ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
Today (October 21) Groupon issued amendment Number 6 to its S-1 filing. The most interesting data are on page 9 of the report, which we repeat below.
What stands out to us is that stockholders’ equity on September 30 is negative—the firm has become technically insolvent! Our prediction that Groupon has a high probability of failure remains intact.
Groupon also displays the results if the IPO goes as hoped for in the last column “Pro Forma as Adjusted.” If a serendipitous IPO transpires, then shareholders’ equity becomes $464 million and financial leverage drops to “only” 64%.
Of course, this felicitous result depends on investors believing the firm to be valued at the estimate provided by management. But, for reasons explained in previous essays, we doubt that investors will buy those rosy projections.
| (in thousands) | As of September 30, 2011 | |||||||||||
| Actual | Pro Forma(1) | Pro Forma As Adjusted(2)(3) |
||||||||||
| Consolidated Balance Sheet Data: | ||||||||||||
| Cash and cash equivalents | $ | 243,935 | $ | 243,935 | $ | 722,735 | ||||||
| Working capital (deficit) | (301,050 | ) | (301,050 | ) | 177,750 | |||||||
| Total assets | 795,567 | 795,567 | 1,274,367 | |||||||||
| Total long-term liabilities | 44,507 | 44,507 | 44,507 | |||||||||
| Redeemable preferred stock | — | — | — | |||||||||
| Cash dividends per common share | — | — | — | |||||||||
| Total Groupon, Inc. stockholders’ (deficit) equity | (14,696 | ) | (14,696 | ) | 464,104 | |||||||
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
Technically insolvent and withering.
http://blog.yipit.com/2011/10/21/the-chart-that-will-scare-away-many-groupon-investors/