Groupon, ManCity and the Credibility of a Regulator

Right now the Securities Exchange Commission and UEFA have more in common than they would think.  In the past month both have been confronted with situations that call into question their role and legitimacy as policemen of their respective neighborhoods.

Groupon Inc., the daily-deal site, is looking to sell shares in an initial public offering valuing the company at close to $20bn.  There is a small problem though that throws a wrench in the plan, Groupon makes no money.  To solve this Groupon has resuscitated a tactic familiar to investors in first generation internet stocks: inventing new measures of profitability.  The Company wants investors to look past traditional income accounting and valuation metrics and focus on its “consolidated segement operating income” or CSOI, a number which excludes certain expenses like online marketing.  The absurdity of the Groupon valuation has been covered at length, but recently the SEC’s ears have perked up and it has cast a more critical eye over Groupon’s IPO prospectus suggesting that some of the overly optimistic language may have to be changed.

Across the Atlantic, Manchester City F.C. and owner Sheik Mansour recently had the extraordinary luck of landing a 10-year sponsorship deal of 400m pounds from Etihad Airlines for the naming rights to the City of Manchester Stadium.   Critics believe it is an attempt to subvert the UEFA’s Financial Fair Play Regulations by artificially inflating Manchester City’s revenue base.  Two facts suggest that they maybe right, the financial terms of the deal dwarf all previous naming deals by an order of ten or more and Etihad happens to be the national airline of the country run by Sheik Mansour’s brother.  Vocal critics like Arsene Wenger and John Henry have asked that UEFA investigate the transaction.

For the SEC this is a chance to draw a line between a decade in which it was (rightfully) laughed at as a toothless regulator and an era of proactive investor protection.  As the first mega-IPO of the new internet generation Groupon is the vanguard of the coming wave,  the way it is inspected will set the norms of behavior for the rest of the Web 2.0 pack.  Will the Commission be viewed as regulator or willing enabler yet again?  UEFA’s reputation has been similarly challenged by one of its most influential members.  Manchester City’s highly suspect naming deal is an overt challenge to the new Financial Fair Play Rules; Mansour has thrown down the gauntlet, will Platini answer?  If UEFA allows the deal to go forward without providing solid evidence that it is above board it will be a deathknell for the regulations adopted barely a month earlier.  If there is no penalty for Manchester City what will stop accounting trickery at other clubs?

Central to both situations is the idea that institutions cannot function without credibility, if a regulator cannot (or will not) enforce its own laws its mandate to govern is forfeit.  In both cases the unmentioned force at work is the influence of money and vested interest.  An army of bankers, lawyers and traders stand to benefit from a smashing Groupon IPO, Manchester City’s economic (and therefore playing) power will loom over European soccer for years to come and people at the SEC and UEFA can continue on careers intact.  On the other side of this equation is the much larger group of investors, soccer supporters and clubs that would benefit most from transparency and fairness.  If money is allowed to trump the law then there is no better evidence for a lack of credibility.

The questions on everyone’s minds are, “Do they have the integrity to stand against vested interest? Do they have the courage to lead?”  The answers that the SEC and UEFA offer in the coming weeks will define the landscape of financial markets and soccer for the forseeable future.

Groupon, ManCity and the Credibility of a Regulator

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