Groupon Down 8% - Will It Cut its Goodwill?

It happens to everyone. You buy that nice, new thing that you've been wanting. At the time, it seemed like a great idea. Who wouldn't want this thing? This thing is the best! I need this thing! Only this thing will make me happy! But later, you realize the thing may not have been such a great purchase. It doesn't do all the things you thought it would. And now, it's got some dents and scrapes. It turns out it's only worth a fraction of what you paid.

That's what happens when a company writes down goodwill. In one recent example, LivingSocial took a $500 million charge against its goodwill for acquisitions it made overseas. Could Groupon (NASDAQ: GRPN  ) be looking at a similar writedown?

LivingSocial's buyer's remorse
As a private company, the view into LivingSocial's finances only comes through Amazon.com's (NASDAQ: AMZN  ) 29% stake in the company. Even with owning a little more than a quarter of the daily deal company, Amazon took a loss of $169 million in its latest quarter, which composed a majority of the company's total quarterly loss of $274 million. The losses related to LivingSocial's acquisitions of foreign daily deal sites based in Southeast Asia and the Middle East. Goodwill is the amount that a company pays over another's book value, and it can be made up of things like brand value or business relationships. LivingSocial apparently paid hundreds of millions over its acquisitions' book values, and the company's have since lost that intangible value. Of course, LivingSocial actually copied its global strategy from the original daily deals company.

Groupon's globe-trotting acquisitions
After Groupon's idea spread to other countries, local start-ups grabbed the opportunity to imitate the company. And, the lack of competitive advantage of its business model made local first-movers a threat. Instead of attempting to fight on their own turf, Groupon purchased its way into several regions of the world. It bought the European Citydeal, Japanese Qpod, Russian Darberry, Hong Kong-based uBuyiBuy, Philippine Beeconomic, Taiwanese Atlaspost, and Indian SoSasta, to name a few. And because of this, Groupon's goodwill and intangibles is near $250 million:

GRPN Goodwill and Intangibles data by YCharts.

Of this nearly $250 million, $192 million is goodwill that doesn't fall under subscriber or merchant relationships, trade names, or developed technology. And of that $192 million, $122 million in goodwill is based internationally. If LivingSocial had to write down its foreign acquisitions, Groupon might have to do the same, as it hasn't taken any major charges from acquisitions since going public.

Groupon's chances of gutting goodwill
It's very possible that LivingSocial could not integrate its acquisitions as effectively as Groupon, which might want to check if it set any world records for number of acquisitions. Looking at the performance of Groupon's international segment, revenue was up about 60% for the first six months of this year, compared to 70% for its domestic revenue. However, marketing as a percentage of segment revenue was 22% internationally, and 13% domestically. Groupon grew faster in the U.S. and spent less money to do it. This could mean that international markets might not present the same opportunity as the U.S., or that they are in an earlier part of the growth curve, as Groupon continues to reduce its marketing expenses.

For operating margins, Groupon took away nearly 17% of domestic revenue after subtracting operating expenses, but only about 9% of international revenues. These are both up from negative values a year prior, but again, keep an eye on whether international markets can earn the same margins as the domestic market in future earnings statements.

Additionally, 80% of Groupon's employees are based internationally, yet the company only earns 55% of its revenue from its international segment. If revenues don't begin to match where the company's resources are targeted, it could be a sign of an underperforming acquisition.

Goodwill write downs
The affect of taking an accounting charge on stock prices varies. Hewlett-Packard  (NYSE: HPQ  ) announced an $8 billion writedown on its $13.9 billion acquisition of EDS in early August, and although its share price has dipped about 25% since the announcement on a lower outlook, shares actually rose over 2% on the day of the news. On the other hand, a Wall Street Journal analysis found Boston Scientific (NYSE: BSX  ) wrote down goodwill in five of the past six years for a total of $9 billion since 2007. And since 2007, its stock price has caved in 70%. With Groupon, taking a haircut to its goodwill could further depress its market capitalization and make investors even more pessimistic about its future.

Be aware of the potential
It's very possible Groupon is realizing all of the value that it paid for in its acquisitions. With its young age, it's difficult to tell how its acquisitions are performing, especially while it cranks down its marketing expenses and enters a new phase of business. But beware that LivingSocial and Groupon took the same acquisition growth strategy in the same industry, and LivingSocial ended up paying too much for its acquisitions.

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10/21/2014 4:00 PM
GRPN $6.22 Up +0.02 +0.24%
Groupon, Inc. CAPS Rating: *
AMZN $315.33 Up +9.12 +2.98%
Amazon.com CAPS Rating: ***
BSX $12.03 Up +0.42 +3.62%
Boston Scientific… CAPS Rating: **
HPQ $34.74 Up +0.92 +2.72%
Hewlett-Packard Co… CAPS Rating: **

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