In an I.P.O., a Clamor for Groupon's Deal

As the daily deal site Groupon headed out on a road show for its public offering, executives faced a tough sell. Fielding questions about the company's management, accounting and model, Andrew Mason, the founder and chief executive, and others had to convince investors that the daily deals site was not this generation's equivalent of Pets.com, the online retailer that imploded after the last dot-com boom.

In mid-October at the St. Regis hotel in New York, the usually irreverent Mr. Mason spoke somberly in business school parlance about gross profits, return on investment and other measures of the company's prospects. Exchanging his usual uniform of jeans and T-shirts for a pressed suit and neat haircut, he told a room of 300 investors that "with a market measured not in billions but trillions of dollars, we're just getting started."

His pitch worked.

On Thursday morning, whispers of zealous demand snaked through Wall Street, with orders well over 10 times the amount of the shares offered, according to two people with knowledge of the offering who requested anonymity because the matter was confidential. As investors clamored for shares, Groupon, at the end of the day, priced its initial public offering at $20, above the expected range of $16 to $18. The stock sale, which raised $700 million, values the company at $12.65 billion.

"The negative press has been overdone," said Christopher Brainard, the head of Brainard Equities, who was waiting to hear from bankers whether his firm got a piece of the I.P.O. "We think there's a lot of demand."

The demand, in part, was driven by a lack of supply. Groupon's current owners are holding on to their stakes, and Groupon is initially selling just 35 million shares, roughly 5 percent of its total.

While it's an exceptionally small pot, it is not a novel template. Groupon is adhering to the example of several stock sales by Internet companies this year, which have favored smaller offerings to help buttress their share prices.

LinkedIn, the professional social networking site that went public in May, initially sold less than 10 percent of its total stock, though it announced plans on Thursday to sell additional shares. By comparison, technology companies in the United States have typically offered about a third of their overall pool, according to Thomson Reuters.

The next test for Groupon comes on Friday, when the company starts trading on the Nasdaq market. If shares of the technology company see a significant pop on the first day, it could set the stage for another strong wave of Internet-related I.P.O.'s for companies like Zynga and Facebook, both of which are expected to sell shares in the next 12 months. Should the Groupon share price fizzle, it could dampen enthusiasm for the broad sector.

David Menlow, the president of the research firm IPOfinancial.com, said that the small size of the offering and high interest in the company would most likely provide a big bump in Groupon's stock price on Friday.

"I think we're going to see prices on this that, on a percentage basis, will be more than the market has seen in many years," he said, adding "the Internet bubble is being slightly re-inflated."

Mr. Mason carefully cultivated Groupon in his image, starting the daily deals site in 2008 with its own brand of irreverence and wit. Cut-rate offers on Botox injections for crow's feet included whimsical references to "miscreant nesting birds." The company's mascot, a chubby tabby cat, donned a thick gold necklace like a hip-hop artist.

The founder exuded the same disregard for professional norms. Sometimes his unorthodox tack led to amusing, if surprising, results, like last year's April Fools joke, Groupöupon, a fictional luxury sales site.

At a conference in January run by the industry blog TechCrunch, he jokingly feigned ignorance about basic financial tenets like revenue.

"I plan to be stupid throughout my career," Mr. Mason, 30, said at the event, slumped in a chair wearing jeans and a rumpled gray-striped shirt.

Despite the antics, Groupon has experienced a major growth spurt. Over the last two years, the company has swelled to more than 10,000 employees, from 100. Quarterly net revenue has grown to more than $430 million, from $9 million, in the same time period.

Groupon hit the big leagues late last year. After spurning a nearly $6 billion takeover offer by Google in December, the company was talked about in the same breathless tones as Facebook and other Internet giants.

By rejecting the Google deal, Groupon also set the stage for its public offering.

The team hired its first chief financial officer, Jason Child, the former head of finances for Amazon.com's international division. Mr. Child also spent roughly seven years at the accounting firm Arthur Andersen.

A few weeks later, Groupon was ready to line up bankers, arranging a string of two-hour meetings in mid-January with top Wall Street firms. Several bank chiefs and Wall Street rainmakers made the pilgrimage, including Brian Moynihan, the head of Bank of America, and Jimmy Lee, JPMorgan Chase's vice chairman, who strutted into Groupon's headquarters in a slick pinstripe suit.

When Goldman's bankers arrived at Groupon's Chicago headquarters, also last January, their entrance was not subtle: a string of black limos pulled up, carrying the chief executive, Lloyd C. Blankfein, and his team, including George Lee, co-head of the firm's global technology,
media and telecom group.

Cognizant of the gap between the company's cultures, the bankers tried to dress down. Instead of full suits with ties, many wore sport coats and buttoned-up shirts, some went without ties.

The mood was jovial, as Goldman strained to impress its audience. The bankers trumpeted the firm's track record, while Mr. Mason and his management team flipped through Goldman's outsize, dark blue pitch books. In a tip to Mr. Mason's whimsy, the pitch book included a picture of the bald Mr. Blankfein next to a Groupon coupon for a hair accessories deal, according to one person with knowledge of the meeting.

Groupon soon chose Morgan Stanley, Goldman and Credit Suisse to lead its offering and split the lion's share of fees, expected to be in the millions of dollars. It also invited 11 other firms, including Allen & Company and Barclays, to join the fete.

The I.P.O. of LinkedIn, which more than doubled on the first day of trading, only fed the interest in Groupon. Investment bankers and some of Groupon's more optimistic investors started floating market values as high as $30 billion.

"Everyone was surprised by how well LinkedIn did," said a person close to the company. "The thinking was, 'If this was a$10 billion company, Groupon is probably worth more.' "
But this summer, Groupon's shine started to fade.

In recent months, the site has become a piñata for analysts. Retailers have littered the Web with complaints. And the company, which first filed its prospectus in June, had to amend its filing several times to appease regulators, who flagged a number of financial accounting issues. The offering was also threatened by a festering sovereign debt crisis in Europe that has rattled global equity markets and chilled the larger I.P.O. market.

As concerns swirled about Groupon's prospects, Mr. Mason and his team went into overdrive to assuage the fears.

In June, the company hired Bradford Williams, a former vice president of Yahoo and eBay, to be its vice president of global communications. In a spate of internal meetings, officials discussed the barrage of negative press, two people with knowledge of the matter said.
Mr. Mason repeatedly expressed frustration to colleagues that he could not discuss any misconceptions publicly because of the quiet period before an I.P.O.

Towards the end of August, Mr. Mason was also dealing with questions from employees, who read some of the negative press about Groupon's slowing growth and worried about their jobs. Stressed, he started to brainstorm ways to comfort his increasingly unwieldy staff of more than 7,000.

Fearing a slap-down by regulators, his communications adviser, Mr. Williams, encouraged him to sit tight, according to a person with knowledge of the situation. But Mr. Williams, who just months into the job was already on his way out, had little influence on Mr. Mason.

On Aug. 25, Mr. Mason pressed send on a 2,400-word e-mail that discussed the company's financials in detail and its competitive strength. Before the day was over, the memo found its way to AllThingsD, a technology news site.

Critics lambasted the 30-year-old chief for what seemed to be a strategic leak and for defying the regulators' rules. Pressed by Securities and Exchange Commission, the company revised its filings once again, to reflect a copy of the memo and additional disclosures.

When the road show kicked off earlier this month, Mr. Mason, dressed in his full suit, appeared poised and seemed to fulfill the role of a composed chief executive on the verge of a public offering.

In New York, the investors in the St. Regis peppered Groupon's management team with questions about the progress of its new application Groupon Now and the company's subscriber numbers. Company executives also looked to address the large marketing budget, which has swelled in the last year, and competitive threats to the business model, including the hundreds of Groupon clones.

Many investors were looking for signs that Groupon was being steered by a capable team that had finally grown up. But others were already smacking their lips about the next stock market darling.

"That was some concerns before the road show," said David Schwartz, a fund manager for DAZ Capital. "But I've been in this business since 1986, and I can tell you when a deal is really hot and this is a hot deal."