Stephen Yang/Bloomberg NewsAndrew Mason, the chief executive of Groupon, was all smiles at the Nasdaq MarketSite as shares of his company began trading.
After a months-long journey filled with blunders, Groupon punched its ticket to the public markets on Friday. And the daily deals site got a warm reception, a welcome sign for Internet start-ups still waiting to go public.
The initial public offering, which was priced at $20 the night before, soared 40 percent at the opening bell to hit $28. Shares breached $31, before settling at $26.11 at the close, valuing the three-year old company at $16.5 billion.
At $700 million, the offering is the largest for a Internet company in the United States since Google in 2004. Groupon is also the first major company to go public since August, when European sovereign debt fears rattled investors and sent the I.P.O. market into a deep freeze.
“Groupon’s I.P.O. certainly helps the U.S. market for technology offerings,” said Josef Schuster, a money manager at IPOX Schuster. “It indicates that people are willing to take risk again.”
Friday’s surge was especially encouraging given the recent criticism of Groupon’s business model and lack of profitability. In recent months, several analysts loudly questioned whether the company was worth even $5 billion — let alone its current 11 figures.
Though it remains to be seen how Groupon will trade in the coming months, analysts say its strong first-day could usher in a second wave of investor enthusiasm for the next generation of Internet start-ups and embolden those companies seeking to go public. Zynga, which amended its filing on Friday with updated financials, is on track to make its debut within the next few months. Facebook, a towering giant of the Web, is expected to follow sometime in 2012 with an offering that values the company at more than $80 billion.
Some newly public companies are already re-upping. LinkedIn, which had a successful debut in May, with shares more than doubling on the first day of trading, announced that it was planning to offer up to $500 million in additional shares.
“People were looking for reasons to be optimistic, well, they found it,” said Michael Duda, a venture capitalist at Consigliere, a consumer investment firm. “If you’re Zynga’s founder, Mark Pincus, you’re probably doing back flips.” Still, Mr. Duda noted, he did not invest in Groupon. “I wouldn’t touch it personally.”
The question is whether Groupon will be able to move higher from here. Analysts are still skeptical that Groupon’s fundamentals justify the market value — a fear that echoed the dot-com boom in the late 1990s.
“The risk is to the downside from here,” said Mr. Schuster, who decided not to buy Groupon shares on Friday. “This will be popular for short-term traders.”
Groupon, like LinkedIn and Zynga, is part of an elite cadre of start-ups that swiftly soared to multibillion-dollar valuations, capitalizing on the growth of online social networks. The group’s ascent over the last two years set off a broader buying frenzy in Silicon Valley. Investors of all sorts eager to own a piece of the next great thing plowed millions into the new generation of start-ups, flooding the markets with capital and bidding up prices across the board.
Against that backdrop, a rush of technology companies went public, like Yandex, a Russian search engine, and Pandora, the online music service. In the first half of this year, the technology sector propped up the larger I.P.O. market. Technology offerings have accounted for about a third of all offerings this year, according to data from Renaissance Capital, an I.P.O. advisory firm.
But the enthusiasm, which seemed to reach a fever pitch earlier this summer, started to cool in August amid volatility in the equity markets and macroeconomic fears.
At that point, Groupon’s bankers, lead by Morgan Stanley, Goldman Sachs and Credit Suisse, cut their estimates for pricing, according to one person with direct knowledge of the matter who was not permitted to talk about the offering publicly. It did not help that the Internet company was also working through accounting issues with regulators who frowned on how Groupon was representing its revenue.
As September dragged on, the underwriters encouraged the company to push ahead with an offering, despite the turmoil. The market was less than ideal and the press was far from glowing, but the plan was to pursue a smaller offering, in size and in price, that would allow the company to go public and put all the related distractions behind it.
Confidence started to build in October, as the management team and its underwriters began a two-week road show across the country. Almost immediately, investors started to place orders, several people said. After deep conversations with some of the largest potential buyers, the underwriters tested a higher price, above the initial target of $16 to $18 a share.
The company’s underwriters tried to give more allocations to established mutual funds, known for buying and holding, instead of less predictable hedge funds suspected of seeking a quick buck, according to two people with knowledge of the matter who were not authorized to discuss the matter publicly.
Some investors expressed interest in paying more than $20 a share, but the bankers wanted to give some space, instead of “pricing to the last available dollar,” one of the people said. The underwriters, following the lead of companies like LinkedIn and Pandora, also kept the offering small, at little more than 5 percent of the total shares.
In the end, demand was so high that orders were more than 10 times the amount of the shares offered.
The successes of Groupon and other newly public Internet companies could be a good omen for the sector. While shares of LinkedIn have pulled back since their debut, the professional social networking site is valued at $8 billion. Zynga, which recently raised funds at a $10 billion valuation, has not had as many public stumbles and is expected to be embraced by investors.
The start-up scene in Silicon Valley may also see a boost.
“Groupon’s I.P.O. is a natural lozenge that will loosen stuff up,” Mr. Duda, the venture capitalist, said. “Confidence is rising, I’ve seen more deal flow in the past 30 to 45 days, than I’ve seen in the last three to five months.”
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