November 22, 2011 / 5:01 PM / in 8 years

Groupon shares slump close to $20 IPO price

(Reuters) - Groupon Inc stock slumped 15 percent on Tuesday on concern about increased competition, leaving shares of the largest daily deal company close to their $20 initial public offering price.

Groupon shares fell to as low as $20.03 in late morning action before recovering slightly. The company was the third-largest decliner on the Nasdaq.

Groupon raised more than $700 million in an IPO in early November.

LivingSocial, Groupon’s closest rival part owned by Inc, announced plans on Monday to offer more than 20 deals with national merchants over the crucial Black Friday shopping period.

Daily deal companies often subsidize national deals, making them less profitable than offers run with local merchants. The national deals usually bring in lots of new customers, but put pressure on profit margins.

“In the last few days, we’ve been hearing about LivingSocial stepping up promotions,” said Edward Woo, an analyst at Wedbush Securities. “The concern is that there will be much more competition for Groupon going forward.”


LivingSocial is offering deals of at least 50 percent off with companies, including Verizon International Inc and Vodafone Group Plc’s Verizon Wireless, Skechers USA Inc, OfficeMax Inc, Hearst Corp and New York Times Co on Black Friday.

On Monday — known as Cyber Monday because consumers often shop a lot online that day — LivingSocial is running 50 percent off deals with companies, including Electronic Arts Inc, Blue Nile Inc and Hewlett-Packard Co’s Snapfish.

LivingSocial’s move to offer so many national deals shows competition in the daily deal business will be particularly intense this holiday, Woo added.

“Groupon is not doing much for Black Friday, so LivingSocial may take customer attention and business away from Groupon,” he said.

Groupon unveiled its holiday plans just over a week ago, including one national deal with retailer American Apparel Inc, as well as discounts on products such as electronics and home goods.

“The overhang of competition existed during the IPO and it still exists today,” said Rick Summer, an equity analyst at Morningstar.

Groupon’s shares closed down $3.51, or 14.9 percent, at $20.07.


Herman Leung, an analyst at Susquehanna Financial Group, said Groupon shares were also lower because it became easier this week to short, or bet against, the company.

Groupon sold about 6 percent of itself in the IPO - one of the lowest floats of the past decade.

In the first week after the IPO, there was little stock available for short sellers, who have to borrow shares before they can sell them. If the stock drops, they can buy it back at a lower price, return the shares to the lender and pocket the difference as profit.

A scarce supply had some brokers charging an annual rate of 90 percent to 100 percent to borrow Groupon stock. But more shares became available to borrow this week, reducing the borrow rate to just over 20 percent, according to Quadriserv AQS, which runs a securities lending platform.

“The cost to borrow was at nearly impossible levels, but it got easier starting yesterday,” Leung said.

Susquehanna makes a market in Groupon shares.


Analysts also said Groupon investors may be concerned about LivingSocial’s plans to raise another round of private financing.

The New York Times reported recently that the company is close to raising about $200 million.

“When your largest competition is looking to raise cash to compete against you, that’s a little concerning,” Leung said.

Reporting by Alistair Barr; editing by Derek Caney, Steve Orlofsky, Gerald E. McCormick and Andre Grenon

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