Friday, November 4, 2011

Groupon IPO highlights undying truths of Wall Street

Posted by Joe Crivelli
As I'm writing this, Groupon's shares are soaring 40% over the IPO price and headlines are toasting the company's successful offering. The bears had their moment to derail the IPO, but it went forward and today we have a newly minted public company trading on NASDAQ under the ticker GRPN.



But Groupon's IPO also demonstrates that nothing has changed on Wall Street. Nothing. The big lesson of the Great Recession is simply this: Keep the machines on, there's money to be made. Maybe that's a good thing!

The traders make all the money.

Way back in the 1990s when I was going to B-school, a finance professor gave us an example of three IPOs. One tumbled 20 percent on its first day of trading. The second traded flat. The third soared 20 percent.

"Which IPO was a failure?" he asked the class. Of course we all said #1, when in fact the answer was #3. Why? Because IPO #3 was underpriced. The underwriters sold the company to Wall Street investors for less than it was really worth.

In doing so, the underwriters failed to maximize the amount of cash from the IPO that would flow into company coffers, and instead maximized the amount of cash that landed in the accounts of the investors who got allotments of the IPO shares.

Now be aware that the investors who get allotments are often the underwriter's very best customers: those who trade most frequently and actively (think short-term day trading hedge funds.)

Groupon went public at $20 per share, and right now is trading at $28. Only 5 percent of outstanding shares were actually offered to the public, but even using the current figures, that means roughly $270 million more cash would be on Groupon's balance sheet if the offering were priced correctly. Instead, it's in the profit column for the investors who were lucky enough to get share allotments.

I can't help but chuckle as I think that somewhere an Occupy Wall Street denizen is responding to a Groupon offer and buying a tent for 40 percent off, while the day traders on Wall Street are toasting a seven- or eight-figure profit that they made by flipping the Groupon shares they got in the offering.

If ever there was an IPO that signaled the return of the tech bubble, Groupon is it.

In perusing the prospectus, the company is on pace to do $1.1 billion of revenue in 2011. The current share price of $28 places the market capitalization at approximately $18 billion. That translates to a price to sales ratio of 16x.

To give you some sense of scale, right now Groupon is worth more than brick-and-mortar discount retailers like Dollar Tree Stores, which has a market cap of $10 billion on $6 billion of annual revenues (a price to sales ratio of 1.7x, or about 90 percent lower than Groupon's, for those of you keeping track.)

And it's certainly worth more than established online retailers like Netflix, which has a $5 billion market capitalization on $2.1 billion of profitable annual revenues. Note that Groupon's market cap even supercedes pre-meltdown Netflix' market cap of about $16 billion.

It's 1999 all over again. Somewhere, today, a Stanford grad is pitching an underwriter with a slideware presentation. And the underwriter is salivating over the prospect of taking the Stanford grad's yet-to-be-incorporated company public.

Good PR wins.

As Groupon prepped for its IPO, there was a heated battle going on over the message. On one hand were Groupon and its spinmeisters, arguing that the company and its business model were the next Amazon, the next Google, the next ... whatever. You get the point.

On the other hand were the bears and their message that Groupon had no real business model, no profits, no true loyal customers ... nothing of value. Guess what? Whatever happens next, the company won. Its IPO got done and will forever be remembered as a smashing success. Good PR wins, every single time.

The IPO business is a funny game, and yes it's rigged to favor the one percenters, but it's also incredibly important to our nation's collective psyche. Remember how good it felt when IPO after IPO smashed the record books circa 1999 and the headlines were about double-digit stock gains instead of double-digit unemployment?

Buzz is everything, and the Groupon IPO has certainly changed the tone of the financial media, if only for a day. If nothing else, that should be something to lift our spirits as we head into the weekend.
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