Groupon's IPO Friday at $20 a share defied doubters who questioned its business model, but it made only 6% of its shares available for public trading. That's not enough to allow big mutual funds to buy in or the venture-capital firms that backed the Chicago-based daily-deal phenom to cash out. Both need more liquidity to trade shares freely without triggering big price swings. That requires a secondary offering that will put more shares on the open market within the next six months or so.
“Going public is a two-step process,” says Tim Loughran, a finance professor who studies IPOs at the University of Notre Dame. “First is the IPO. Then they'll need to do a secondary offering relatively quickly to let the venture capitalists exit and let the institutional investors get a bigger role.”
A secondary offering requires a rising stock price. To keep its shares climbing from their Friday closing price of $26.11, Groupon's business results over the next few months must banish persistent questions about its ability to keep growing and turn a profit.
Late in the trading day Monday, Groupon was trading down 1.3% at $25.78.
“No one knows what the long-term operating model is for the company,” says David Rudow, an analyst at Minneapolis-based Thrivent Investment Management Inc., one of the nation's largest mutual funds, who listened in on Groupon's investor road show. He's still deciding whether to buy, but he prefers a larger float.
Josef Schuster, founder of Chicago-based IPOX Schuster LLC, a $2.5-billion fund, is skipping Groupon's offering because of the small float. “We usually look for 8% to 10%,” he says.
