DealZone

Rosetta Stone IPO shows it pays to leave ‘em wanting more

April 16, 2009

What a difference a day makes.

A day after college operator Bridgepoint Education Inc had to settle for a shrunken IPO, language instruction company Rosetta Stone actually priced its $112.5 million IPO above its estimate price on Wednesday, and has followed that up by rising 42 percent in its inaugural trading day Thursday. But that “pop” might be a deliberate marketing decision, rather than a major mispricing of the deal.

Much of Rosetta’s success may have had to with the small size of float– 6.25 million shares– which led analyst Ben Holmes of Morningnotes.com to say the IPO had “built it in demand.”

And any company hopes to price its deal to get a first day “pop” to reward investors for their risk-taking. IPO Boutique‘s Scott Sweet said that Rosetta Stone’s enormous first day pop — if it holds, it will be the largest since Intrepid Potash‘s 58 percent starting jump nearly a year ago — will ingratiate investors and make raising additional money through a follow on easier. (Rosetta Stone CEO Tom Adams told Reuters on Thursday the company had no plans now to raise more money.)

But typically in a down market, bankers say a deal should be priced ideally to pop by 20 percent, so Rosetta Stone’s 42 percent pop might be overdoing it by leaving so much money “on the table.” Then again maybe not.

Adams told Reuters that the IPO was a major part of Rosetta Stone’s efforts to build its brand, and get the prestige of a listing on the New York Stock Exchange, as it works to build its business abroad. In an unusual move, the company used its IPO to tie in a promotion featuring a free seven day trial for the first 25,000 people to sign up.

Rosetta Stone could probably have taken home another few million dollars, but as IPO Desktop president Francis Gaskins put it, “They bought millions of dollars in advertising by pricing the deal as they did.”

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