While Groupon Inc. executives are focused on how their upcoming IPO will fare, everyone else on Wall Street is thinking about how the deal could affect as many as a dozen other companies hoping to launch in its wake.
Groupon's initial public offering, which is scheduled to begin trading Nov. 4 on the Nasdaq under the symbol GRPN, has drawn a lot of attention during the company's road show marketing rounds. The events have been heavily attended, but the deal is getting generally negative reviews from analysts heading into the final leg before its pricing.
Although Groupon pared its third quarter loss to $10.6 million from $101.2 million in the second quarter by cutting its marketing costs, its increase in revenue slowed considerably to just under 10%, hardly the kind of top-line numbers that growth investors seek. Additional criticism has been leveled at Groupon for issues ranging from its management style to the use of unusual accounting metrics that were eventually knocked out of its prospectus by regulators.
Morningstar Inc. said in a research note this week that it believes Groupon intentionally cut back on marketing in the third quarter to improve its bottom line headed into the IPO, and looking ahead, the company must choose between profitability and rapid revenue growth because "we think the two are mutually exclusive."
The company's financial metrics suggest that Groupon "is today's Webvan," says Francis Gaskins, president of research site IPOdesktop.com, referring one of the more prominent dot-com flops.
That's not to say anyone is ruling out a good first day performance by Groupon. The 14 investment banks involved in the deal have a stable of other companies that they'd also like to take public in the weeks to come, and a poor showing by Groupon could chill investor interest in other new issues.
The deal is certainly structured to work: the company's valuation has been cut from original estimates of $20 billion to $11.4 billion. Its price-to-sales ratio is 6.3, below other web-based IPOs like LinkedIn Corp. (LNKD),Pandora Media Inc. (P) and Zillow Inc. (Z), though its price-to-book-value ratio is 23 times, slightly above those three, says Gaskins, using annualized estimates based on the most recent quarterly results.
Only 30 million shares are being sold, excluding an overallotment option that underwriters could exercise, or 4.7% of the total shares outstanding, an incredibly small float for such a large company [Most IPOs over $100 million sell more than 15%]. Such a tight hand over available shares is designed to ensure there will be enough demand to support the stock on the first day--and weeks afterward.
In the last decade, there have been 22 companies that have floated less than 10% of their shares while raising at least $100 million in an IPO, and all but one has traded up on its first day, according to Greenwich, Conn.-based Renaissance Capital.
"This has been one of the more controversial names we've seen," said Paul Bard, a director of research at Renaissance Capital. "But there's a high probability that the deal not only gets done, but that it trades reasonably well afterward."
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