No Wonder Companies Don't Want To Go Public

Henry Blodget Business Insider April 4, 2012

See Also Sorry, But It's Not The SEC's Job To Stop Investors From Making Stupid Decisions UH-OH: The SEC Is Looking Closely At Groupon, Says Report THE TRUTH ABOUT HEDGE FUNDS: They Win And You Lose There has been a dearth of IPOs in recent years.

This has led to widespread complaints among public-market investors that there's nothing exciting to invest in anymore.

It has also led to a much broader development of the private markets for hot emerging technology companies.

As a result, investors who can invest via these private markets have cashed in, while public-market investors have missed out.

Meanwhile, the companies that do go public are already so big and highly valued that there's often not much upside left.

So, why is it that companies don't go public anymore?

Well, for one thing, there's the cost. Thanks to the massive regulatory burden the country now places on public companies, it costs at least $5 million a year to be public. What small company in its right mind would want to pay that?

Then, for another thing, there's the enormous hassle and legal risk.

Case in point: Groupon.

Groupon went public at the end of last year. The company is only three years old. It's expanding into many new business lines, so it's still learning as it goes. One of the things Groupon just learned is that the new high-ticket items it is selling have a higher return rate than the lower-ticket items. This realization forced Groupon to restate its Q4 earnings just a few months after going public.

Is that embarrassing?

Yes.

Is it FRAUD?

Unlikely. More likely, Groupon just wasn't conservative enough in its assumptions. Presumably, it has now learned a searing lesson.

But now look at what Groupon has to deal with:

Hagens Berman Announces Lead Plaintiff Deadline in Groupon Class Actions INVESTOR ALERT: Former Louisiana Attorney General and Kahn Swick & Foti, LLC, Remind Investors With Large Financial Interests of Important Deadline in Class Action Lawsuit Against Groupon, Inc. - GRPN Pomerantz Law Firm Has Filed a Class Action Against Groupon, Inc. -- GRPN Girard Gibbs LLP Launches Groupon Legal Investigation Brock & Leviton Investigates Groupon And Its Officers And Directors For Violation Of Securities Laws Newman Ferrara LLP Investigates Groupon For Breaches of Fiduciary Duty Robbins Geller Rudman & Dowd LLP Files Class Action Suit Against Groupon

That's just a small sample--there will be many more.

All of these defenders of the stupid innocent will search the land to find some mom and pop investors--people who never, ever should have bought a stock as risky as Groupon--and use them to shake down Groupon for some settlement money.

And Groupon will pay the settlement money, just to make these folks go away.

The lawyers will take most of the settlement. The mom and pop investors will probably get about $2.98 apiece.

Importantly, Groupon looked like a lousy investment when it went public. That's what I shouted from the rooftops. That's what Jim Cramer shouted from the rooftops. That's what a boatload of other people shouted from the rooftops.

But what made Groupon lousy was not the fact that it has had to make a minor earnings restatement. It was that investors were just paying way too much for the stock of a company that was still experiencing major growing pains.

Investors who choose to do that, voluntarily, despite all the warnings, should take some responsibility for their decisions.

But they won't.

Because this is America. The United States Of Litigation. The country where if you do something stupid it's always someone else's fault.

And that means that, if there is any conceivable way for "the public" to invest in your company, you're eventually going to get your ass sued off--whether or not the investment was suitable or smart for the people who bought it.

So, faced with that reality, why WOULD any company want to go public?

Why not just stay private? Reduce your litigation risk. Keep your costs down. Deal only with investors who understand that investing is a voluntary and risky activity and that sometimes, god forbid, you actually lose money.

SEE ALSO: Sorry, It's Not The SEC's Job To Prevent People From Losing Money On Dumb Investments

See Also The Hot New Fear Of Big Investors: Growth 14 Fascinating Insights From Wall Street's Sharpest Minds RelatedPosts.init() Spotify Just Came Up With The Best Use We've Seen For The Facebook Timeline

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600px wide (preview) <iframe src="http://www.businessinsider.com/embed?id=4f7c1cdc69bedd933a00001c&width=600&height=430" width="600" height="430" border="0" frameborder="0"></iframe> 400px wide (preview) <iframe src="http://www.businessinsider.com/embed?id=4f7c1cdc69bedd933a00001c&width=400&height=430" width="400" height="430" border="0" frameborder="0"></iframe> 300px wide (preview) <iframe src="http://www.businessinsider.com/embed?id=4f7c1cdc69bedd933a00001c&width=300&height=430" width="300" height="430" border="0" frameborder="0"></iframe> // setup button event listeners // embed post var widgetSizes = [ "", "", "" ]; embedWidgets(widgetSizes); Blackboard Home » Groupon Summary Groupon is a deal-of-the-day website that is localized to major markets in the United States and Canada. Launched in November 2008, the first market for Groupon was Chicago, followed soon thereafter by Boston and New York City... More » SEC Summary The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's... More » Henry Blodget is CEO and Editor-in-Chief of Business Insider. Contact: e-mail: hblodget@businessinsider.com Subscribe to his RSS feed | twitter feed Ask Henry a Question Recent Posts LIVE FROM WHITE HOUSE: Team... Now Germany's Samwer brothe... Sorry, But It's Not The SEC... The Water Cooler 15 Comments 16 0 Flag as Offensive kryptic on Apr 4, 9:21 AM said: Henry, Groupon's problems are entirely self-inflicted. They chose to use flaky accounting methods to show phantom profits and are now suffering from the consequences of that decision. Reply 5 0 Flag as Offensive Max on Apr 4, 9:38 AM said: @kryptic: Mr. Blodget, I just want to point something simple out: Groupon is a totally crap example of why there should be less regulation, as Groupon has from its inception been a slow moving accounting fraud train wreck of a story. Groupon proves why there needs to be more, not less regulation. Groupon will end its days in bankruptcy and its mangers and directors in court on fraud charges. Long dated put options are the way to go on this one....two years till this company dies at the maximum. Reply 0 6 Flag as Offensive Henry Blodget on Apr 4, 10:32 AM said: @Max: Groupon will be fine. They're going through a challenging period, just the way hundreds of other companies have. But for some reason that's not acceptable in the public market. You have to be perfect. or you get sued. Reply 1 0 Flag as Offensive deception on Apr 4, 10:38 AM said: @kryptic: if a company is LYING, it should be worried Reply $('.replies .view-all a').click(function() { $(this).parent().parent().removeClass('alert').html(' Loading'); }); 8 1 Flag as Offensive Charming Astrophysicist on Apr 4, 9:23 AM said: Poor GRPN. They intentionally make accounting errors to seem more profitable [or as if they are less unprofitable] and they have to deal with all this negative sentiment. I feel horrible for them. Reply 3 0 Flag as Offensive Beltway Greg on Apr 4, 9:25 AM said: To quote Spinal Tap: "There's a fine line between clever and stupid." Reply 3 2 Flag as Offensive Peter Verkooijen on Apr 4, 9:25 AM said: What does Groupon produce? What service does Groupon provide? Groupon is not a company, it's a scam. A Yale Obamacrat hypocite Wall Street leech wouldn't know the difference of course. Reply 2 0 Flag as Offensive Andrew Mason on Apr 4, 9:25 AM said: Why do I give a f*ck. I cashed out all my equity. Thanks Prudential and Fidelity! Reply 0 1 Flag as Offensive Greg on Apr 4, 9:34 AM said: Groupon was probably a bad example. They may have cooked their books. That said, the provide a service - they are an advertising firm and a pretty good one at that. Still the general point is dead on. Nobody with a start up and a clue really wants to go public. Much better just getting bought. I shudder at the thought of ever running a public company. No amount of money is worth it to me. Reply 0 0 Flag as Offensive Dean Wormer on Apr 4, 10:06 AM said: Henry you are so barking up the wrong tree here. 900 public listed companies and we need one more POS like GRPN?! Puleeze. The underwiters set the opening. The greater fools line up to pay 6000x gross because the squid says it must be worth that much. Casino capitalism my friend. I am all for free markets until they aren't anymore. Excelerated revenue, capitalized marketing. Oldest game in the book. Reply 0 0 Flag as Offensive Jay Yarow What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. on Apr 4, 10:10 AM said: Could Groupon stay private? Could Facebook? Would their VC backers, or employees, accept that? Reply 0 0 Flag as Offensive nologin What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. on Apr 4, 10:17 AM said: i love how the SEC comes down hard on "reporting" of public companies and completely ignores the questionable practices of those that "own" them albeit for fractions of a second in many cases. Reply 0 1 Flag as Offensive WhatAJoke on Apr 4, 10:21 AM said: A mathematician, a statistician, and an economist walk in for an accounting job interview at Groupon... The first question they are asked is how much is 5 + 5 The mathematician answers 5. The statistician answers 5 +/- 10% The economist closes the door, draws the blinds and ask... 'How much do you want it to equal?' Groupon hired the economist... Reply 0 0 Flag as Offensive Just for the record ...... on Apr 4, 10:36 AM said: Groupon had an offer to be bought by Google for $6 billion. Could have saved themselves the "trouble". Instead here we are with restatements and lawsuits. Sympathy? Don't think so. Reply 0 0 Flag as Offensive rquist on Apr 4, 1:36 PM said: Come on Henry, how can you say they are going to be fine. To lower guidance on the last day of the quarter shows a mangement team that has no idea of what is happening at the company. This story is only going to get worse. Reply Receive email updates on new comments! 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This has led to widespread complaints among public-market investors that there's nothing exciting to invest in anymore.

It has also led to a much broader development of the private markets for hot emerging technology companies.

As a result, investors who can invest via these private markets have cashed in, while public-market investors have missed out.

Meanwhile, the companies that do go public are already so big and highly valued that there's often not much upside left.

So, why is it that companies don't go public anymore?

Then, for another thing, there's the enormous hassle and legal risk.

Case in point: Groupon.

Is that embarrassing?

Yes.

Is it FRAUD?

Unlikely. More likely, Groupon just wasn't conservative enough in its assumptions. Presumably, it has now learned a searing lesson.

But now look at what Groupon has to deal with:

That's just a small sample--there will be many more.

And Groupon will pay the settlement money, just to make these folks go away.

The lawyers will take most of the settlement. The mom and pop investors will probably get about $2.98 apiece.

Investors who choose to do that, voluntarily, despite all the warnings, should take some responsibility for their decisions.

But they won't.

Because this is America. The United States Of Litigation. The country where if you do something stupid it's always someone else's fault.

So, faced with that reality, why WOULD any company want to go public?

SEE ALSO: Sorry, It's Not The SEC's Job To Prevent People From Losing Money On Dumb Investments

Please follow SAI on Twitter and Facebook.

To embed this post, copy the code below and paste into your website or blog.

Active Users on BI right now...Click for more live stats »

| Hey Yahoos: Here's How To Get A Big, Fat Severance Deal 1

Take Thompson for a ride, baby.

| Why The Future of Shazam Is TV, Not Music

| Can Apple Give Police Your Encrypted iPhone Data?

| What Is Data Mining?

| Imagine A Web Browser Without An Interface

| 45 Minutes With @albertwenger

| Facebook's response to Yahoo's patent lawsuit

| The littleBits Ted Talk

| Social Reading on GoodReads

| Revisited: big VCs investing in seed rounds

| INFOGRAPHIC: The Facebook Timeline Of Social Commerce

| The Board Of Directors: Board Meetings

Here Are The 'New' Nike Uniforms For All 32 NFL Teams 723,379 Views

ON THE HOT SEAT: 10 Tech CEOs Who Could Be Fired Tomorrow 296,646 Views

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No Wonder Companies Don't Want To Go Public

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