Groupon makes IPO of scarce shares look cheap

November 4, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Groupon has given its initial public offering investors a deal. The Internet coupon firm’s stock popped as much as 50 percent early on Friday. Short-term excitement was assured by signing up most of Wall Street to peddle 6 percent of its stock. Longer term, keeping a valuation approaching $20 billion will require more tangible things like profit.

The company has shown it can grow its top line rapidly, but evidence of the ability to generate profit is so far elusive. Both Eric Lefkofsky, the chairman, and Andrew Mason, the chief executive, publicly or quasi-publicly made optimistic remarks that they shouldn’t have in the run-up to the offering. And skepticism is widespread over Groupon’s business model, especially whether it has any durable edge over the ferocious competition to offer Internet deals.

Yet the company managed to boost the size of its offering – the largest technology IPO in several years – and the shares were holding more than 40 percent above Thursday’s $20 a share IPO price in early afternoon trading on Friday. That’s the ideal result for Groupon: it proves there’s demand for the stock, but doesn’t suggest that way too much money was left on the table.

Yet there is artifice in the outcome, too. Groupon sold a very small slice of its equity, which makes it hard to judge the depth of demand. Demand Media, Pandora and LinkedIn all sold less than 10 percent of their shares to the public in their IPOs last year. All three technology firms’ shares popped on their first day of trading. All have since fallen sharply. Pandora is now trading slightly below its initial offer price, and Demand Media a stonking 55 percent below.

At some point, Groupon shares held by insiders will hit the market or the company could sell more to raise cash. That will bring another test of investor demand. For LinkedIn, a third-quarter loss and a $500 million secondary equity offering announced on Thursday brought an 8 percent drop in its shares on Friday – they remain well above its IPO price, but below the level to which the shares rocketed on their debut.

With its small float, Groupon could also fall victim to this pattern. The best way to avoid it and justify its valuation would be for the company to show that it can make money while continuing to grow fast. That particular combo isn’t on offer yet.

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