Friday, November 4, 2011

Groupon IPO

Of relevance to my undergraduate students in BUS 420 - Groupon has just conducted its IPO.   We'll be talking in class about issuing securities to the public next week - so pay attention!

Here are a few links related to Groupon.

Aswath Damodaran has a crack at valuing the stock.  His valuation came in around $14 - somewhat less than the offer price of $20.  He notes that his valuation makes some pretty optimistic assumptions.

The actual IPO of Groupon raised $700M.  This values the overall company at 12.7Bn.   But what is important to note here is that the IPO only sold a fraction of the company's equity (5%).  In essence Groupon is testing the waters with a small sale.  As Jay Ritter of the University of Florida notes - the initial price pop is largely due to the very restricted initial supply of stock.

If the price holds up then I would expect Groupon to follow up the IPO with several much larger secondary equity offerings in the coming months.  Google raised far more money in secondary offerings than in the initial IPO.

Investors also shouldn't read much into the initial price pop for Groupon.  Of 25 recent hot IPOs, 20 tanked later.

Finally what about IPOs in general?  In most countries around the world, IPOs underperform in the long run when compared to similar non-IPO stocks.  For example US IPOs underperform by about 20% after three years.  (See page 15 of this article).

Update: Trading of Groupon has started and the price is up 40%.