Stephen Foley: Groupon's share collapse highlights the big paradox of the small float

 

Outlook: I take no pleasure in having seen Groupon shares tumble below the price of their initial public offering this week.

No, that's a lie. Regular readers know that I think investors are going to get their fingers burned on this one. Fingers, hands and all the way up to the elbow, probably. For all the hype over the "daily deals" pioneer, Groupon hasn't proved yet that it is a business that will last.

But we will see. In the meanwhile, the spectacular collapse of Groupon shares, and the shares of several other recently floated internet superstars, illustrates an interesting problem: the paradox of the small float.

When Groupon came to market last month, it floated less than 6 per cent of the company. Pandora, the popular but barely profitable internet radio business, whose shares are down about one-third from their float price, made just 9 per cent available. Both took their cue from the social networking giant LinkedIn, which was out the gate in May, also selling less than 10 per cent of the company.

The lure of the small float is obvious. The artificial scarcity creates a frenzy of demand for the tiny supply of shares on offer, causing investors to drive the price sky high. Except that this is exactly the wrong way investors should respond.

Very little is certain about the future for these speculative internet ventures, but there is one thing you can count on. And that is that shareholders accounting for more than 90 per cent of the company are itching to sell down their holdings.

LinkedIn shares, in contrast to its peers, are still comfortably above the IPO price, but they have taken a battering over the past two weeks because of insider share sales. With the expiry of the six-month lock-in, early investors and management cashed out a further $700m (£450m), all in the name of "increasing liquidity". When early employees were also freed to sell, at the start of this week, the stock took another leg down.

It is no coincidence that Groupon's share price slide accelerated this week as speculators took a look at the situation at LinkedIn. Groupon's founders and early investors have not been shy in cashing out of the company at every opportunity since its creation three years ago, and being a public company makes it even easier for them.

So, this is the paradox of the small float: investors bid a premium for the few shares on offer when, because of a giant overhang of future sellers, they ought to demand a discount.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Financial Director / FD / Senior Finance Manager

Up to 70k DOE: Guru Careers: We are seeking an experienced Financial Director ...

Recruitment Genius: Junior / Apprentice Sales Executives - OTE £50,000

£11000 - £50000 per annum: Recruitment Genius: This financial company offer ma...

SThree: Recruitment Consultant

competitive + incentives + uncapped comms: SThree: Did you know? 98% of our di...

SThree: Trainee Recruitment Consultant

competitive: SThree: Did you know? 98% of our directors started with SThree as...

Day In a Page

Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks
The haunting of Shirley Jackson: Was the gothic author's life really as bleak as her fiction?

The haunting of Shirley Jackson

Was the gothic author's life really as bleak as her fiction?
Bill Granger recipes: Heading off on holiday? Try out our chef's seaside-inspired dishes...

Bill Granger's seaside-inspired recipes

These dishes are so easy to make, our chef is almost embarrassed to call them recipes
Ashes 2015: Tourists are limp, leaderless and distinctly UnAustralian

Tourists are limp, leaderless and distinctly UnAustralian

A woefully out-of-form Michael Clarke embodies his team's fragile Ashes campaign, says Michael Calvin
Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen