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DealBook: In an I.P.O., a Clamor for Groupon’s Deal

November 4, 2011 by Leave a Comment

Andrew Mason, chief of Groupon.Seongjoon Cho/Bloomberg NewsAndrew Mason, chief of Groupon.

9:09 p.m. | Updated

As the daily deal site Groupon headed out on a road show for its public offering, executives faced a tough sell. Fielding questions about the company’s management, accounting and model, Andrew Mason, the founder and chief executive, and others had to convince investors that the daily deals site was not this generation’s equivalent of Pets.com, the online retailer that imploded after the last dot-com boom.

In mid-October at the St. Regis hotel in New York, the usually irreverent Mr. Mason spoke somberly in business school parlance about gross profits, return on investment and other measures of the company’s prospects. Exchanging his usual uniform of jeans and T-shirts for a pressed suit and neat haircut, he told a room of 300 investors that “with a market measured not in billions but trillions of dollars, we’re just getting started.”

His pitch worked.

On Thursday morning, whispers of zealous demand snaked through Wall Street, with orders well over 10 times the amount of the shares offered, according to two people with knowledge of the offering who requested anonymity because the matter was confidential. As investors clamored for shares, Groupon, at the end of the day, priced its initial public offering at $20, above the expected range of $16 to $18. The stock sale, which raised $700 million, values the company at $12.65 billion.

“The negative press has been overdone,” said Christopher Brainard, the head of Brainard Equities, who was waiting to hear from bankers whether his firm got a piece of the I.P.O. “We think there’s a lot of demand.”

The demand, in part, was driven by a lack of supply. Groupon’s current owners are holding on to their stakes, and Groupon is initially selling just 35 million shares, roughly 5 percent of its total.

While it’s an exceptionally small pot, it is not a novel template. Groupon is adhering to the example of several stock sales by Internet companies this year, which have favored smaller offerings to help buttress their share prices.

LinkedIn, the professional social networking site that went public in May, initially sold less than 10 percent of its total stock, though it announced plans on Thursday to sell additional shares. By comparison, technology companies in the United States have typically offered about a third of their overall pool, according to Thomson Reuters.

The next test for Groupon comes on Friday, when the company starts trading on the Nasdaq market. If shares of the technology company see a significant pop on the first day, it could set the stage for another strong wave of Internet-related I.P.O.’s for companies like Zynga and Facebook, both of which are expected to sell shares in the next 12 months. Should the Groupon share price fizzle, it could dampen enthusiasm for the broad sector.

David Menlow, the president of the research firm IPOfinancial.com, said that the small size of the offering and high interest in the company would most likely provide a big bump in Groupon’s stock price on Friday.

“I think we’re going to see prices on this that, on a percentage basis, will be more than the market has seen in many years,” he said, adding “the Internet bubble is being slightly re-inflated.”

Mr. Mason carefully cultivated Groupon in his image, starting the daily deals site in 2008 with its own brand of irreverence and wit. Cut-rate offers on Botox injections for crow’s feet included whimsical references to “miscreant nesting birds.” The company’s mascot, a chubby tabby cat, donned a thick gold necklace like a hip-hop artist.

The founder exuded the same disregard for professional norms. Sometimes his unorthodox tack led to amusing, if surprising, results, like last year’s April Fools joke, Groupöupon, a fictional luxury sales site.

At a conference in January run by the industry blog TechCrunch, he jokingly feigned ignorance about basic financial tenets like revenue.

“I plan to be stupid throughout my career,” Mr. Mason, 30, said at the event, slumped in a chair wearing jeans and a rumpled gray-striped shirt.

Despite the antics, Groupon has experienced a major growth spurt. Over the last two years, the company has swelled to more than 10,000 employees, from 100. Quarterly net revenue has grown to more than $430 million, from $9 million, in the same time period.

Groupon hit the big leagues late last year. After spurning a nearly $6 billion takeover offer by Google in December, the company was talked about in the same breathless tones as Facebook and other Internet giants.

By rejecting the Google deal, Groupon also set the stage for its public offering.

The team hired its first chief financial officer, Jason Child, the former head of finances for Amazon.com’s international division. Mr. Child also spent roughly seven years at the accounting firm Arthur Andersen.

A few weeks later, Groupon was ready to line up bankers, arranging a string of two-hour meetings in mid-January with top Wall Street firms. Several bank chiefs and Wall Street rainmakers made the pilgrimage, including Brian Moynihan, the head of Bank of America, and Jimmy Lee, JPMorgan Chase’s vice chairman, who strutted into Groupon’s headquarters in a slick pinstripe suit.

When Goldman’s bankers arrived at Groupon’s Chicago headquarters, also last January, their entrance was not subtle: a string of black limos pulled up, carrying the chief executive, Lloyd C. Blankfein, and his team, including George Lee, co-head of the firm’s global technology, media and telecom group.

Cognizant of the gap between the company’s cultures, the bankers tried to dress down. Instead of full suits with ties, many wore sport coats and buttoned-up shirts, some went without ties.

The mood was jovial, as Goldman strained to impress its audience. The bankers trumpeted the firm’s track record, while Mr. Mason and his management team flipped through Goldman’s outsize, dark blue pitch books. In a tip to Mr. Mason’s whimsy, the pitch book included a picture of the bald Mr. Blankfein next to a Groupon coupon for a hair accessories deal, according to one person with knowledge of the meeting.

Groupon soon chose Morgan Stanley, Goldman and Credit Suisse to lead its offering and split the lion’s share of fees, expected to be in the millions of dollars. It also invited 11 other firms, including Allen Company and Barclays, to join the fete.

The I.P.O. of LinkedIn, which more than doubled on the first day of trading, only fed the interest in Groupon. Investment bankers and some of Groupon’s more optimistic investors started floating market values as high as $30 billion.

“Everyone was surprised by how well LinkedIn did,” said a person close to the company. “The thinking was, ‘If this was a$10 billion company, Groupon is probably worth more.’ ”

But this summer, Groupon’s shine started to fade.

In recent months, the site has become a piñata for analysts. Retailers have littered the Web with complaints. And the company, which first filed its prospectus in June, had to amend its filing several times to appease regulators, who flagged a number of financial accounting issues. The offering was also threatened by a festering sovereign debt crisis in Europe that has rattled global equity markets and chilled the larger I.P.O. market.

As concerns swirled about Groupon’s prospects, Mr. Mason and his team went into overdrive to assuage the fears.

In June, the company hired Bradford Williams, a former vice president of Yahoo and eBay, to be its vice president of global communications. In a spate of internal meetings, officials discussed the barrage of negative press, two people with knowledge of the matter said.

Mr. Mason repeatedly expressed frustration to colleagues that he could not discuss any misconceptions publicly because of the quiet period before an I.P.O.

Towards the end of August, Mr. Mason was also dealing with questions from employees, who read some of the negative press about Groupon’s slowing growth and worried about their jobs. Stressed, he started to brainstorm ways to comfort his increasingly unwieldy staff of more than 7,000.

Fearing a slap-down by regulators, his communications adviser, Mr. Williams, encouraged him to sit tight, according to a person with knowledge of the situation. But Mr. Williams, who just months into the job was already on his way out, had little influence on Mr. Mason.

On Aug. 25, Mr. Mason pressed send on a 2,400-word e-mail that discussed the company’s financials in detail and its competitive strength. Before the day was over, the memo found its way to AllThingsD, a technology news site.

Critics lambasted the 30-year-old chief for what seemed to be a strategic leak and for defying the regulators’ rules. Pressed by Securities and Exchange Commission, the company revised its filings once again, to reflect a copy of the memo and additional disclosures.

When the road show kicked off earlier this month, Mr. Mason, dressed in his full suit, appeared poised and seemed to fulfill the role of a composed chief executive on the verge of a public offering.

In New York, the investors in the St. Regis peppered Groupon’s management team with questions about the progress of its new application Groupon Now and the company’s subscriber numbers. Company executives also looked to address the large marketing budget, which has swelled in the last year, and competitive threats to the business model, including the hundreds of Groupon clones.

Many investors were looking for signs that Groupon was being steered by a capable team that had finally grown up. But others were already smacking their lips about the next stock market darling.

“That was some concerns before the road show,” said David Schwartz, a fund manager for DAZ Capital. “But I’ve been in this business since 1986, and I can tell you when a deal is really hot and this is a hot deal.”

Michael J. de la Merced contributed reporting.

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Agency Struggles to Safeguard Pipeline System

September 10, 2011 by Leave a Comment

And in the Midwest, a 35-mile stretch of the Kalamazoo River near Marshall, Mich., once teeming with swimmers and boaters, remains closed nearly 14 months after an Enbridge Energy pipeline hemorrhaged 843,000 gallons of oil that will cost more than $500 million to clean up.

While investigators have yet to determine the cause of either accident, the spills have drawn attention to oversight of the 167,000-mile system of hazardous liquid pipelines crisscrossing the nation.

The little-known federal agency charged with monitoring the system and enforcing safety measures — the Pipeline and Hazardous Materials Safety Administration — is chronically short of inspectors and lacks the resources needed to hire more, leaving too much of the regulatory control in the hands of pipeline operators themselves, according to federal reports, an examination of agency data and interviews with safety experts.

They portray an agency that rarely levies fines and is not active enough in policing the aging labyrinth of pipelines, which has suffered thousands of significant hazardous liquid spills over the past two decades.

Transportation Secretary Ray LaHood, who oversees the pipeline agency, acknowledges weaknesses in the program and is asking Congress to pass legislation that would increase penalties for negligent operators and authorize the hiring of additional inspectors. That may be a tough sell in a Congress averse to new spending and stricter regulation.

“We need to know with great certainty that inspections and replacements have been done in a timely way that will prevent these kinds of spills from happening,” he said.

Federal records show that although the pipeline industry reported 25 percent fewer significant incidents from 2001 through 2010 than in the prior decade, the amount of hazardous liquids being spilled, though down, remains substantial. There are still more than 100 significant spills each year — a trend that dates back more than 20 years. And the percentage of dangerous liquids recovered by pipeline operators after a spill has dropped considerably in recent years.

The industry, however, believes the current system works and points with pride to what it considers a record of improvement.

“Data shows that releases from pipelines have declined over the last decade as the result of stringent regulation and the industry’s continued commitment to safety,” wrote Peter Lidiak, pipeline director for the American Petroleum Institute, an industry group, in an e-mailed response.

Throwing more resources and money at the problem may not be the answer for the tiny agency, because there remain deeper concerns about how it works, especially its reluctance to mandate safety improvements or to level meaningful fines for wrongdoing.

Such concerns come at a critical time for the agency. The State Department last month gave a provisional green light to a controversial 1,661-mile pipeline from Canada to Texas, called Keystone XL, that will carry a trickier form of crude — and fall under the agency’s purview. And a just-released National Transportation Safety Board report on a natural gas pipeline explosion in San Bruno, Calif., that last year cost eight people their lives, characterized the agency’s regulatory practices as lax and inadequate. In the report, the safety board urged the Transportation Department to go back and audit many of the pipeline agency’s safety and enforcement policies.

An analysis of federal reports and safety documents by The New York Times suggests that while the agency performs better than it did 10 years ago, it still struggles to safeguard a transport network laced with risks.

For example, the agency requires companies to focus their inspections on only the 44 percent of the nation’s land-based liquid pipelines that could affect high consequence areas — those near population centers or considered environmentally delicate — which leaves thousands of miles of lines loosely regulated and operating essentially on the honor system. Meanwhile, budget limits and attrition have left the agency with 118 inspectors — 17 shy of what federal law authorizes.

Pipeline operators, critics argue, have too much autonomy over their lines, and too much wiggle room when it comes to carrying out important safeguards, like whether to install costly but crucial automated shut-off valves.

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DealBook: Postcrisis, New Investment Tactics to Lure the Ultra Wealthy

August 12, 2011 by Leave a Comment

Girish Reddy, a founder of Prisma Capital Partners, seeks to avoid specialty overlap in the hedge funds he invests in.Hiroko Masuike/The New York TimesGirish Reddy, a founder of Prisma Capital Partners, seeks to avoid specialty overlap in the hedge funds he invests in.

Funds of hedge funds are changing their ways.

For decades, the money managers, which invest across a number of hedge funds, lured big institutions with the promise of diversification. They justified the extra fees by saying their extensive due diligence would help protect investors from major blowups.

Then the financial crisis struck, and the strategy failed. Weighed down by the added expenses, the baskets of funds lost on average more than individual portfolios.

Some failed to detect fraud in their underlying holdings. Fairfield Greenwich Advisors and Tremont Group Holdings lost billions of dollars when Bernard L. Madoff’s fund turned out to be a huge Ponzi scheme.

Since then, the investments have been a tough sell. Assets in funds of funds stand at $667 billion, some $130 billion below their 2007 peak. By contrast, the overall hedge fund industry just reached new record highs, with more than $2 trillion, according to Hedge Fund Research. Increasingly, institutional investors are opting to pay consultants to advise them on allocations, or are investing directly into hedge funds themselves. Ultrawealthy individuals, once major investors in funds of funds, have yet to return full force since 2008.

Amid the wreckage, some funds of funds are adapting their strategies and enhancing their services. They’re also looking to new lines of business, as investors seek out lower fees and greater protection in the aftermath of the crisis.

“The needs of the client have changed and the demands have increased,” said Henry P. Davis, managing director at Arden Asset Management, a fund of funds that manages about $8 billion, down from $12 billion at its peak. “It’s been a pressure that has been constructive, in terms of strengthening and broadening the scope of what you have to offer.”

Arden, for example, is now helping clients vet other potential alternative investments. Investors have access to more than 40,000 reports on external hedge funds that the firm has written over its 18-year history. Arden executives also provide consulting services, joining clients for onsite visits at money managers they’re considering.

In the current market, investors are also seeking established firms with heft. Behemoths like the Blackstone Group, which manages some $37 billion in its fund of funds business, have had little trouble raising money.

To help gain size, smaller firms are pairing with competitors, giving them new sources of capital and investors. In June, Arden announced an agreement to manage an additional $1.3 billion in assets for another money manager in the space.

Others are tailoring products to the needs of specific investors, rather than creating one-size-fits-all portfolios.

At Prisma Capital Partners, a fund of funds started by three former partners at Goldman Sachs, some 70 percent of assets are dedicated to customized portfolios that consider clients’ risk tolerance, their cash needs or the mix of their overall holdings.

Prisma is also more active than the typical fund of funds. The firm regularly analyzes its holdings and changes its lineup to take advantage of market opportunities and avoid overlap. For example, Prisma may opt to drop a manager who trades insurance products for one that specializes in mortgage-related investments.

“Our process tries to identify the specialists who have very defined areas of expertise in order to avoid overlap,” Girish Reddy, a founder and managing partner, said. “We don’t want five of our managers in the same position.”

The flexible strategy has appealed to investors. Prisma’s assets have swelled to nearly $7 billion, up from $5 billion before the crisis.

Niche funds of funds are also in vogue.

Dorset Management, a New York-based asset manager, is planning to start a commodities-focused fund of funds in the coming months, according to a person with knowledge of the matter. Some funds of funds are marketing so-called seeding platforms, which buy pieces of hedge funds in their infancy.

Liongate Capital Management, which runs about $3.2 billion, focuses on hedge funds with $500 million to $2 billion. It allows the firm to distinguish itself from larger rivals, whose asset loads make it difficult to invest in portfolios of that size. Liongate, which has had annualized returns of 9.45 percent since 2004, has pulled in about $2 billion since the financial crisis, reaching a new peak in assets.

“Fund of funds that are of a midsize like us have to differentiate themselves,” said Jeff Holland, a managing director at Liongate.

SkyBridge Capital, the firm run by Anthony Scaramucci, is trying to attract assets with a different type of vehicle that has a lower minimum. Clients pay only $50,000 to get access to a portfolio that invests in multibillion-dollar hedge funds like Third Point and SAC Capital.

Over all, SkyBridge manages about $8.5 billion across its funds.

While investors must still earn at least $200,000 a year or have a net worth in excess of $1 million, it is a far cry from the $10 million minimum investment required for many top hedge funds.

Mr. Scaramucci says he is trying to broaden the distribution channels for hedge funds, which have historically been reserved for the ultrawealthy and institutions. To do so, he is also charging a fraction atop the hefty hedge fund fees, roughly 1.5 percent of the assets. A typical fund of funds charges 1 percent of assets and takes 10 percent of profit.

“The fund of funds community is going out and identifying people that need services,” Mr. Scaramucci said.

The tactic seems to be working. Since June of last year, the business has grown to about $1.7 billion in assets under management from about $600 million.

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Disney Plans Lavish Park in Shanghai

April 8, 2011 by Leave a Comment

Disney hopes the Shanghai Disney Resort will be as transformative for the company as the establishment of Walt Disney World in Orlando, Fla., was in the 1970s. It wants to create an engine that will drive demand among China’s 1.3 billion residents for other products, like Pixar films and princess dolls.

Like many global companies, Disney is putting its faith in the rise of the Chinese consumer, and at the same time it is counting on Shanghai’s specific ambitions to become a world-class city.

There will be obstacles. Disney’s first foray into China — its theme park in Hong Kong — got off to a slow start after opening in 2005. It may be a small world, but cultural miscues, including a failure to understand how guests would use the park on holidays like Chinese New Year, resulted in angry customers and damaging media coverage.

The Disney brand is also not as deeply ingrained in China as in other parts of the world. China is the only major country that does not have a Disney Channel, the company’s typical way of building its brand and stoking demand for its experiences and products. Even the concept of brand is a tough sell in China, where cheap knockoffs proliferate overnight.

The Shanghai resort’s first phase — one of the largest foreign investments in China ever — will include a 225-acre Magic Kingdom-style park with a castle surrounded by themed areas. The park component alone will cost $3.7 billion. There will also be two hotels, a lake and a shopping district, bringing the total size of the first phase to about 963 acres. Disney hopes to have the complex open by the end of 2015, an ambitious time line.

This resort has long been expected, but until now plans have been largely secret. They call for its eventually stretching across 1,730 acres in the Pudong district southeast of downtown. The Chinese media have estimated that the full resort, including upgrades to transportation infrastructure in the area, could cost about $15 billion.

A resort of this scale would have a capacity like that of Disney World, which attracts about 45 million visitors a year. In acres, the Chinese resort will be vastly larger than Hong Kong Disneyland.

Notably, Disney did not identify which of its classic rides — Space Mountain, It’s a Small World, Pirates of the Caribbean — it will bring to the Chinese mainland. One reason may be those knockoffs: When Disney unveiled detailed plans for Hong Kong Disneyland, rival parks in Asia quickly installed cheaper rides with striking similarities.

Disney is also walking a careful line with the Chinese government, which approved the park, after two decades of off-again, on-again talks, on the condition that it would be sharply different from the original Disneyland, which has become a symbol of American culture. Disney agreed to heavily incorporate Chinese culture; dressing Mickey Mouse in a kung fu robe would not do.

“Authentically Disney but distinctly Chinese” is how Robert A. Iger, Disney’s chief executive, described the resort in an interview. “There will certainly be familiar Disney elements, but it will also be quite different from the moment that you walk through the gates,” he said.

Shanghai’s Disneyland, for instance, will not feature a Main Street-theme entrance, a staple of every other Disney resort. (The Main Street areas are designed to reflect Walt Disney’s idyllic childhood in a Missouri town at the turn of the 20th century.) Instead, guests will enter through a lush 11-acre area featuring water and trees, where they will be greeted by costumed characters, Mr. Iger said. The castle will be Disney’s biggest.

Disney will shoulder about 43 percent of the initial cost, and its partner, Shanghai Shendi Group, a consortium of state-owned companies, will cover the balance. That split mirrors the resort’s ownership structure.

But Disney will have operational control, holding a 70 percent stake in a management company created with Shendi to run the resort.

David Barboza reported from Shanghai and Brooks Barnes from Los Angeles.

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