As Groupon's gearing up for it's long-awaited initial public offering on Friday, Business Insider editor Henry Blodget explains why Goldman Sachs is promoting the notion that it's "oversubscribed." Citing estimates from an anonymous source, Blodget writes that Goldman is handing out "crazy earning estimates" to their most premium customers to build the case that Groupon is undervalued at its current $16 to $18 per share price range. Blodget explains the underwriters' strategy is to lowball Groupon's IPO price just enough to encourage traders to buy and "instantly flip the stock." In doing so, he says that the underwriters who set the IPO price "will likely be handing out free money." Blodget explains how analysts inflate investors' expectations:
Groupon is said to be planning to price its stock at $1-$2 above the $16-$18 price range. This suggests there is enough demand to support a trading price in the low $20s. But it does NOT suggest that there is so much demand for Groupon's stock that the stock will pop to, say, $50. Pricing a couple of dollars above a seemingly lowballed price-range for a deal this visible is not a sign of wild demand. It's a sign of solid demand.
The process actually has a lot in common with the subprime mortgage situation that shattered our economy a couple of years ago. Groupons' underwriters at Goldman are telling their top customers that the company will earn a dollar per share in 2013. Citing Groupon's sinking revenue and the fact that its losing money, Blodget says, "That assumption seems pretty heroic." This doesn't mean that Groupon stock will amount to toxic assets in a year's time, but the bankers are adjusting the truth a bit. Why exaggerate? Because the bankers stand to make a wagon full of cash by gaming the market a little bit — and possibly screwing over Groupon and some initial investors in the process.
This is exactly what we saw back in May when LinkedIn made its blockbuster IPO. Blodget blogged about the bankers' maneuverings then and suggested that the underwriters cheated LinkedIn out of about $130 million. Joe Nocera at The New York Times explains how:
The fact that the stock more than doubled on its first day of trading — something the investment bankers, with their fingers on the pulse of the market, absolutely must have known would happen — means that hundreds of millions of additional dollars that should have gone to LinkedIn wound up in the hands of investors that Morgan Stanley and Merrill Lynch wanted to do favors for. Most of those investors, I guarantee, sold the stock during the morning run-up. It's the easiest money you can make on Wall Street.
At that point in time, people screamed "BUBBLE!" while the investors counted their cash. Wall Street loves easy money, but these kinds of tricks can't be good for the stability of the tech industry in the long run. If Goldman is planning on printing some money when Groupon goes public, just imagine what they'll do when it's Facebook's turn.