The proposed IPO price of $18 for Groupon Inc., the company of a popular daily deal site, is largely overvalued when compared to its current, pre-IPO book value. The company has about $7 million in shareholders' equity as of March 31, 2011 according to its Form S-1, the registration statement filed with the SEC. Shares outstanding are about 600 million, which gives the company a book value of one penny a share ($7 million/600 million shares). According to Bloomberg News, only 30 million shares, or about 5 percent of the total shares, are offered to the public, and at $18 per share, the company will receive $540 million in IPO proceeds. Thus after IPO, Groupon's book value changes from $0.01 per share to about $0.85 per share ($547 million/630 million shares).
As a result, existing shareholders experience an increase in book value of 85 folds, whereas shareholders who newly bought shares through its IPO would sustain a loss of 95 percent off the $18 purchase price if measured on a book value basis ([$18-$0.85]/$18). In other words, investors are paying over 21 times the company's book value, compared to normal price-to-book multiples in the low single digits for most stocks. Moreover, Groupon has yet to show a profit, and with continued losses, shareholders will see their book value of equity further eroded. Additionally, the $18 IPO price would give the company a market value of about $11 billion, putting the company, still relatively a startup, within the large-cap category. This is quite unrealistic by any common notion.
As a result, existing shareholders experience an increase in book value of 85 folds, whereas shareholders who newly bought shares through its IPO would sustain a loss of 95 percent off the $18 purchase price if measured on a book value basis ([$18-$0.85]/$18). In other words, investors are paying over 21 times the company's book value, compared to normal price-to-book multiples in the low single digits for most stocks. Moreover, Groupon has yet to show a profit, and with continued losses, shareholders will see their book value of equity further eroded. Additionally, the $18 IPO price would give the company a market value of about $11 billion, putting the company, still relatively a startup, within the large-cap category. This is quite unrealistic by any common notion.
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