This article was first published on Insightia’s Vulnerability module. For more information about the product, click here.
Groupon, a small-cap online commerce firm, has been in decline for several years. Despite some short-lived false recoveries, its share price is currently at $3 – not far from its all-time low (post initial public offering) of around $2.20 posted in February 2016.
Groupon, whose headquarters are in Chicago, has international operations and specializes in offering local goods and services at a discount. The firm had its initial public offering in November 2011 and closed at just over $26 on the first day of trading – its share price has since dropped over 88%. Problems are evidenced in share price performance over both the long and short term: in early 2014 its share price was around $12, and when comparing Groupon with its Activist Insight Vulnerability-selected peers over the course of the last 12 months, it has the poorest total shareholder returns of negative 46% compared to a peer median of 18%. The company, given its price being in deep discount territory, looks ripe for more activist interest.
Different strategies have been tried over the last few years, but Groupon’s struggles remain. International cost-cutting plans took place between 2015 and 2017, reducing its operational footprint from 47 countries to 15 countries, with total costs and expenses for the business having been reduced by $460 million since 2016 to $2.6 billion. There has also been a noticeable acquisition at the end of April this year: Groupon purchased 80% of Cloud Savings Company (a U.K.-based business operating online discount code and digital gift card platforms) as part of a strategy to expand into this international segment. Upon purchase of the remaining outstanding shares, set to go through in December, the total outlay for the acquisition will be around $74 million.
As well as these strategies, a share repurchase program is in place. After the previous program’s expiry in April, the board of directors authorized a common share repurchase program for up to $300 million in May.
The current business strategy is focusing on acquiring and retaining high-value customers – those that are more likely to spend repeatedly on Groupon, rather than ‘one-and-done’ customers with little long-term value. Chief Executive Officer Rich Williams explained that push emails no longer account for 100% of the business, but instead account for about 20%. North American service revenue has decreased by approximately 8% for the period of nine months ending September 2018 – relative to the nine months ending September 2017 – whilst product revenue has fallen approximately 23% during the same period.
Despite these woes, there are some signs of strategies coming to fruition. Whilst cutting international operational costs, total international revenue has actually increased by over 11% in the first nine months of 2018 relative to the first nine months of 2017. Groupon’s new voucher-less offering called Groupon+ (which links up to a credit card) has seen a five-fold increase in the number of redemptions (1.3 million) in the last year, despite an overall drop in Groupon users.
Many of Groupon’s Activist Insight Vulnerability-selected peers already have activists with current stake holdings. Fluent, Meet Group, and Telaria have 16%, 10% and 8% activist holdings, respectively, whilst Insignia Systems has seen share repurchase programs, board changes, and special dividend pay-outs since entry from Groveland Capital. Similar actions could be replicated at Groupon.
Whilst Groupon already has a total activist holding of over 4.5%, no activist has yet made a public demand. An activist may look to replicate the action at Insignia Systems and pay a dividend to those who’ve seen poor returns over the years: of Groupon’s 10 other peers, only Interpublic Group of Companies has more excess cash on the books ($1.8 billion), so Groupon could use some of its over $550 million in excess cash (group median of $70 million) to reward shareholders. In previous years with operating losses (such as in 2016 when Groupon had to pay out $57 million for infringing IBM patents), this would not have been as appropriate as it is now.
Changes to the board could be viable, albeit difficult: insider ownership is not negligible, with just under 17% owned by the 14-strong board (and just under 16% owned by Chairman Eric Lefkofsky). Despite the election to the board of Joseph Levin, Deborah Wahl, and Michael Angelakis within the last two years, CEO Williams’ three-year tenure hasn’t moved its share price – it has only stagnated. Whilst some strategies have shown signs of bringing about positive change, the current share price shows the market doesn’t share the optimism for Groupon.
According to Activist Insight Governance, there is no staggered board or poison pill, thus governance structures that may otherwise prove as obstacles for activists are removed. If an activist would wish to propose board changes, the nomination window closes 90 days before the 2019 annual meeting on June 14.