Groupon prices IPO shares at $20

Groupon CEO Andrew Mason. Credit: Source: REUTERS/Lucas Jackson

Daily-deals site set to go public Friday in face of palpable skepticism from investors

If ever an Internet IPO faced a rocky launch, it's Groupon's.

The daily-deals site on Thursday priced shares for Friday's expected public offering at $20, modestly above the initial announced range of $16 to $18. (The company's stock will trade on the Nasdaq exchange under the ticker symbol GRPN.)

That smallish bump in price was in response to "surprisingly strong demand for the biggest U.S. IPO in months," according to three buyside sources who spoke to Reuters.

Don't buy the buyside sources' comments. In the real world, "surprisingly strong demand" would justify a much higher price hike than Groupon's.

For example, last May professional social networking site LinkedIn (NASDAQ: LNKD) upped its share target price range to $42 to $45 from $32 to $35.

A month later, Pandora Media (NYSE: P) increased its IPO offer range to $10 to $12 a share from the original $7 to $9. I know, dollar-wise it's essentially the same as Groupon's, but it's much higher than Google's on a percentage basis: 37.5% compared to 17.6%, if you use the mid-point prices.

Underwriters who think they have an IPO moonshot on their hands pull out all the stops to manipulate the rubes gullible first-day investors. But Groupon's underwriters -- Morgan Stanley, Goldman Sachs and Credit Suisse Group -- know they have a tough sell on their hands.

Six months ago, the daily-deals site was an IPO breakout waiting to happen. The Chicago-based company had spurned a $6 billion offer from Google last last year and seemingly was positioning itself for a public offering which promised to value it at three or four times that price. Only Facebook's potential IPO generated more interest.

But since filing in early June to go public, the company has sustained one self-inflicted wound after another, most prominently drawing the harsh scrutiny of the Securities and Exchange Commission for its practice of overstating revenue.

Then there were the departures this year of two chief operating officers, along with comments from CEO Andrew Mason and co-founder Eric Lefkofsky that arguably violated the SEC's "quiet period" rules. Not to mention the continued heavy losses as Groupon spends wildly on marketing.

The growing skepticism of Wall Street caused Groupon to postpone a road show in September. And whatever you may read about the packed rooms of investors for the road show Groupon launched last week, there's still plenty of skepticism out there.

From Reuters:

Some money managers were skeptical enough to skip the roadshow altogether.

Carrie Endries, a principal at Boston-based money manager Lowell Blake & Associates, which has about $600 million in assets under management, said some of her clients initially were excited about the Groupon IPO, but that enthusiasm has waned.

"It felt like the Internet bubble all over again," Endries told Reuters in an email message. "Luckily, the last 10 weeks have tempered that kind of irrational exuberance."

Not exactly what underwriters want to hear on the eve of an initial public offering.

About all they can do is restrict supply, and old trick designed to push up share prices. And guess what? That's what they've done! Groupon is offering 35 million shares to the public, or just 5.5% of its 637.3 million shares outstanding. On a percentage basis, that's even smaller than LinkedIn and Pandora, each of which sold 9.4% of their respective shares when they went public.

In fact, Groupon's "float" -- even with the extra shares added Thursday -- is smaller than any other U.S. Internet company since at least 2000, according to Bloomberg.

Finally, at the $20 price, Groupon's IPO would value the company at $12.6 billion, twice Google's offer but well under the $20 billion to $25 billion dreamed of by Groupon underwriters a few months ago.

I'll be surprised if Groupon's IPO "pops" on Friday. Then again, I won't be at all.

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