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
Arts and Entertainment
The teaser trailer has provoked more questions than answers
filmBut what is Bond's 'secret' that Moneypenny is talking about?
News
Johnny Depp is perhaps best known for his role as Jack Sparrow in Pirates of the Caribbean
peopleBut how did he break it?
Arts and Entertainment
Paul Walker and Vin Diesel in Fast and Furious 5
film
Sport
Lewis Hamilton secured his second straight pole of the season
f1Vettel beats Rosberg into third after thunderstorm delays qualifying
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss