(Updates share price in sixth paragraph.)
Nov. 4 (Bloomberg) -- Groupon Inc. relied on some of Silicon Valley’s top bankers to pull off an initial public offering that drew investor skepticism as stock-market volatility increased the most in three months.
Paul Kwan, Morgan Stanley’s head of Internet and software banking, worked with George Lee, the Goldman Sachs Group Inc. banker who helped raise $1.5 billion for Facebook Inc. in January, and Credit Suisse Group AG’s co-chairman of global technology, Bill Brady, to help Groupon fetch a valuation of about $12.7 billion, 11 percent higher than targeted.
Groupon pitched the IPO to investors just as stock swings widened in reaction to Europe’s debt crisis. The company’s valuation had tumbled since March, when a $25 billion price tag was discussed with bankers, people familiar with the matter said at the time. Since filing to go public, Chicago-based Groupon came under scrutiny from regulators about its accounting, restated results and lost executives.
“Marketing any type of risky asset in this type of environment would require some pretty good salesmanship,” said Walter Todd, co-chief investment officer at Greenwood, South Carolina-based Greenwood Capital, which oversees about $940 million. “Those guys are obviously experienced at doing that.”
Morgan Stanley is the No. 1 underwriter of IPOs globally this year, while Goldman Sachs and Credit Suisse place third and fourth, respectively, data compiled by Bloomberg show. Morgan Stanley, which led Groupon’s sale, also had top billing on some of the biggest Internet IPOs this year, including LinkedIn Corp., HomeAway Inc. and Pandora Media Inc., filings show.
Groupon surged as much as 56 percent in its trading debut after pricing the offering yesterday at $20 a share. The company raised $700 million, compared with the $540 million they filed to raise Oct. 21. The shares, listed under the symbol GRPN on the Nasdaq Stock Market, rose $6.11, or 31 percent, to close at $26.11.
The Chicago Board Options Exchange Volatility Index, or VIX, climbed 42 percent in the first two days of this week, as Groupon pitched the IPO to potential investors. That was the biggest increase in volatility since Standard & Poor’s downgraded the U.S.’s credit rating in August.
Groupon offered a smaller percentage of shares than typical in an IPO, a strategy that banks use to stoke demand and help a company achieve the valuation it’s seeking. In Groupon’s case, the company had planned to offer 4.7 percent of its stock, less than in any U.S. Internet-company IPO of more $200 million since at least 2000, Bloomberg data show. It ended up selling 5 million more shares than the 30 million it had planned.
“This model of the low float creating its own demand has worked,” said Greenwood’s Todd.
Morgan Stanley, Goldman Sachs and Credit Suisse were picked to underwrite the IPO earlier this year after Groupon rejected a $6 billion takeover offer from Google Inc. Several banks vied for the business, and Goldman Sachs Chief Executive Officer Lloyd Blankfein visited the startup in January to pitch for the mandate, a person familiar with the matter said then.
Morgan Stanley edged out Goldman Sachs to become the first name among the banks listed on the IPO prospectus. The designation, or the so-called lead left position, typically gives a bank the biggest role in a sale and the largest fees.
Kwan is leading the Groupon IPO for Morgan Stanley, whose technology investment banking group is run by Michael Grimes and Paul Chamberlain. At Goldman Sachs, Scott Stanford, the co-head of Internet and new media banking, is running the offering with Lee, global co-head of technology, media and telecommunications.
“The top investment banks solicited Groupon heavily to get this deal,” said Ryan Jacob, a portfolio manager for the Jacob Internet Fund in New York with $42 million under management.
Morgan Stanley, Goldman Sachs and Credit Suisse may stand to make almost $40 million in combined fees, based on estimates of typical payments in IPOs. Underwriters usually collect 5 percent to 7 percent of the capital raised in a sale, and lead banks can get about 80 percent of that amount, according to according to Lam Nguyen, a vice president at New York-based research firm Freeman& Co.
Spokesmen for Morgan Stanley, Goldman Sachs and Credit Suisse declined to comment.
Groupon, which compared itself with Amazon.com Inc. in meetings with investors, is going public with slower growth and a less productive workforce than Amazon did at the time of its 1997 IPO. The unprofitable company owed almost twice as much to merchants at the end of September as it held in cash, and its marketing costs rose 37 percent in the latest quarter.
“It’s not surprising they hired the best of the best,” said Eric Risley, a managing partner at Architect Partners LLC in Menlo Park, California, who has worked as an investment banker for 22 years. “Going to the public market at this stage of Groupon’s growth is a bit unusual because its business model is not yet refined and proven.”
--With assistance from Douglas MacMillan in San Francisco and Lee Spears in New York. Editors: Jennifer Sondag, Elizabeth Wollman
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