DealBook: Ahead of I.P.O., S.E.C. Pressed Groupon On Accounting, Disclosures

AppId is over the quota
AppId is over the quota

Ahead of Groupon‘s highly anticipated initial public offering in November, the Securities and Exchange Commission repeatedly pressed the daily deals giant to defend its business model and its accounting measures, according to comment letters recently disclosed.

The letters, sent by the S.E.C. from June 29 to Oct. 3, provide an interesting window into the back-and-forth discussions between the Internet company and its regulators in the months leading up to its I.P.O. In the letters, the S.E.C. seemed somewhat skeptical of Groupon’s business model and called on the company to balance its bullish statements with additional disclosures. Regulators also asked Groupon to address comments made by executives during the so-called quiet period, which seemed to defy S.E.C. rules.

Shares of Groupon slipped nearly 2 percent on Wednesday to close at $22.62 per share.

In the first letter, dated June 29, the S.E.C. outlines 73 comments, spanning 14 pages. Among the comments, regulators called on Groupon to list specific risk factors for its international operations, provide additional data on consumer attrition and repeat merchants and temper certain statements about the company’s growth prospects. In one section, for instance, the regulators advise the company to reframe a comment made by its chief executive, Andrew Mason, who had said in a filing that “Groupon is better positioned than any company in history to reshape local commerce,” to include the company’s “net losses and competitive landscape.”

In response to another statement made by Mr. Mason, that “our customers and merchants are all we care about,” the regulator reminded Groupon of its responsibility to its investors:

“Please balance the statements regarding the premise that your customers and merchants are all you care about with a discussion of your fiduciary duty to shareholders.”

As evident in the letters, the S.E.C. spent a lot of time parsing the statements of Groupon’s executives on and off the prospectus. In its first comment letter, regulators called on the company to address a Bloomberg News interview, during which Groupon’s co-founder, Eric P. Lefkofsky, said the not-yet-profitable Groupon was going to be “wildly profitable.” Several months later, the S.E.C. also asked the company to provide the full text of an internal e-mail sent by Mr. Mason, which was somehow leaked to the media.

Notably, the S.E.C. was particularly clear about its reservations on Acsoi, or adjusted consolidated segment operating income, an uncommon financial yardstick Groupon introduced in its first filing. In the June 29 letter, the S.E.C. said Acsoi — which is essentially operating profit stripped of marketing and acquisition costs — was somewhat misleading to prospective investors:

It appears that online marketing expense is a normal, recurring operating cash expenditure of the company. Your removal of this item from your results of operations creates a non-GAAP measure that is potentially misleading to readers. Please revise your non-GAAP measure accordingly.

The exchange between the S.E.C and Groupon, reveal the company’s initial resistance. In a July 14 letter to the S.E.C., the company tried to defend its math, arguing that Acsoi does include some expenses related to marketing for existing subscribers. The S.E.C. was not swayed, and in a subsequent letter, simply asked for its removal. On Oct. 10, Groupon complied in a revised filing.

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Unboxed: How Samuel Palmisano of I.B.M. Stayed a Step Ahead - Unboxed

AppId is over the quota
AppId is over the quota

Yet behind I.B.M.’s relentless progress over the last decade is a game plan that has been anything but conservative. The company shed multibillion-dollar businesses. It chose higher profit margins over corporate size, and expanded aggressively overseas, seeking sales, low-cost engineering talent and quicker organizational reflexes.

Investors, however, haven’t been bored. The company’s stock price has surged. In November, Warren E. Buffett, who typically shuns technology stocks, announced he had accumulated $10 billion of I.B.M. shares, a stake of more than 5 percent.

All of that didn’t just happen. A large portion of the credit goes to Samuel J. Palmisano, who steps down on Sunday after nearly a decade as chief executive. During his tenure, I.B.M. has been a textbook case of how to drive change in a big company — when so much of the study of business innovation focuses on start-ups and entrepreneurs.

This column is a glimpse of the thinking behind some of the major steps I.B.M. has taken under Mr. Palmisano’s leadership, based on two recent interviews with him.

He says his guiding framework boils down to four questions:

? “Why would someone spend their money with you — so what is unique about you?”

? “Why would somebody work for you?”

? “Why would society allow you to operate in their defined geography — their country?”

? “And why would somebody invest their money with you?”

Mr. Palmisano formulated those questions in the months after he became C.E.O. in March 2002 His predecessor, Louis V. Gerstner Jr., recruited to I.B.M. in 1993, had already pulled the company out of a financial tailspin, first reducing the size of the work force and cutting costs, and then leading a remarkable recovery.

In meetings after he took over, Mr. Palmisano told colleagues that I.B.M. was still good, but that it wasn’t the standard-setting corporation that it had been when he joined in 1973. (A history major at Johns Hopkins and a star offensive lineman on the football team, he turned down a tryout with the Oakland Raiders of the N.F.L. for a sales job at the company.)

The four questions, he explains, were a way to focus thinking and prod the company beyond its comfort zone and to make I.B.M. pre-eminent again. He presented the four-question framework to the company’s top 300 managers at a meeting in early 2003 in Boca Raton, Fla.

“This needs to be our mission and goal, to make I.B.M. a great company,” he said, according to executives who attended the gathering.

THE pursuit of excellence in those four dimensions shaped the strategy. To focus on doing unique work, with its higher profits, meant getting out of low-margin businesses that were fading. I.B.M.’s long-range technology assessment in 2002 concluded that the personal computer business would no longer present much opportunity for innovation, at least not in the corporate market.

The hub of innovation would shift to services and software, often delivered over the Internet from data centers, connecting to all kinds of devices, including PCs. Today, that is called cloud computing; when I.B.M. started promoting the concept several years ago the company called it on-demand computing.

So Mr. Palmisano led a lengthy strategic review of the PC business, deciding to sell while it was still profitable. Internal arguments against a sell-off were intense: PCs pulled in sales of other I.B.M. products in corporate accounts, the cost of electronic parts for its larger computers would jump without the purchasing power of its big PC division, and the corporate brand and its reputation would suffer without PCs, the one I.B.M. product touched by millions of people.

Lately, Hewlett-Packard has engaged in a similar debate, first declaring that it was looking to sell its PC business, then backing off. “I’ve heard every one of the arguments, every one of them,” Mr. Palmisano says. “But if you decide you’re going to move to a different space, where there’s innovation and therefore you can do unique things and get some premium for that, the PC business wasn’t going to be it.”

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