In some respects, Groupon’s highly anticipated initial public offering is just as much a test of the investment banks that are trying to take it public as of the startup itself.
That test began late Friday as a gaggle of banks revved up their effort to sell shares in a company that has faced tough questions, growing skepticism and a plummeting valuation over the last six months.
Only three of the 1,213 U.S. IPOs since 1998 that raised over $100 million offered 5.4%–the amount Groupon is offering–or less of their shares when going public, according to Dealogic. Nine of 10 U.S. IPOs over $100 million are done with sales of more than 15% of a company’s stock, said Dealogic, with most done at between 15% to 35%.
Representing Groupon in the road show will be CEO Andrew Mason, chief financial officer Jason Child, senior vice president Jeff Holden and vice president Kartik Ramachandran, according to the email.
Little Andy's Groupon gypsy caravan was discovered just a few miles outside of Chicago, headed to the Big Apple to convince investors that their stock is worth $16 a share.
One top venture capitalist whose firm did not invest in Groupon said he has been getting calls over the last few weeks from investment bankers about the deal. “They are very nervous,” he said.
Participating bankers are calling venture investors to get a read on the situation and sound them out on valuation. They thought the deal was going to be an easy-money bonanza but in their rush to jump on the Groupon bandwagon they may have missed or overlooked serious red flags, such as slowing growth, accounting and disclosure gaffes and massive insider selling, said the venture investor.
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And while Groupon cut its third-quarter loss to $10.6 million, down from $101.2 million in the second quarter, by slashing its spend on marketing, a blog post by deal aggregator Yipit notes that marketing spending also fuels growth by acquiring new subscribers. Revenue growth in the third quarter fell to 9.6%, from 33% in the second quarter and 72% in the first quarter.
Yipit co-founder and CEO Vinicius Vacanti in the blog post wrote.
“For a business that’s roughly break-even, Groupon will certainly need to justify a valuation over $10 billion via a growth story. Unfortunately, that growth story needs some convincing.”
The Groupon road show begins on Monday and will focus on the Eastern seaboard the first week, with stops in New York on Monday, the Mid-Atlantic region on Tuesday, and Boston on Wednesday, while circling back to New York on Thursday and Friday, according to an email sent by an executive director of institutional equity sales of JP Morgan late Friday afternoon to potential buyers of the shares.
The initial reactions to the deal will come on Monday from big institutional investors, who will be invited to private sessions with Groupon executives, said one investor who has received an invitation to the road show.
Smaller investors will be invited to the group sessions being held later in the week. On Wednesday, Groupon is hosting a group lunch at the Intercontinental Hotel in Boston, according to the email. On Friday, Groupon is hosting another group lunch in New York at the St. Regis Hotel, according to the email. The investor said.
“There is a lot of hierarchy in banking.”
Goldman Sachs trader says, "Okay, its a done deal, 10,000 shares of GRPN at $16, plus Little Andy is throwing in some Groupons for ya to help you out during your retirement years."
The second week will take the Groupon show West with stops in San Francisco on Monday the 31st, Denver and Los Angeles on Tuesday, and the Midwest on Wednesday. The company hopes to price the offering on Thursday November 3.
The active bookrunners of the offering are Morgan Stanley, Goldman Sachs and Credit Suisse, while the passive bookrunners include a host of other banks such as JP Morgan, Allen & Company, Bank of America Merrill Lynch, Barclays Capital, Citigroup, Deutsche Bank Securities, Wells Fargo Securities, and William Blair & Co., according to the email.
Banks will have a lot of egg on their face if they don’t get this deal done at a valuation high enough to make money for its late-stage investors, who valued the company at more than $5 billion less than a year ago when Groupon raised around $950 million, the venture investor said.
Earlier this year, when banks were jostling to get in on the Groupon deal, they believed Groupon could sell more than a $1 billion of stock, giving the three-year-old company a valuation of $20 billion or more.
Now, the banks are hoping to selling as much as $621 million in stock for a valuation north of $10 billion, according to the company’s prospectus. The JP Morgan email said the approximate sale of stock would be worth $510 million.
In another sign of shifting sentiment, Groupon and its banks have drastically cut the amount of stock they are trying to sell to just 5.4% of available shares, which in theory could help prop up the price of the company. The risk of keeping a very small float is that it could increase volatility in trading and turn off big investors who seek highly liquid stocks to trade.
COMMENTARY: I wish I were in on that Groupon roadshow to hear what kind of story Little Andy is going to be telling those large and small institutional investors. I have a feeling it is going to be a doozey.
Courtesy of an article dated October 19, 2011 appearing in The Wall Street Journal
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