If the Groupon IPO is so popular, why doesn’t it ask for a higher price?

Groupon is expected to price its highly-anticipated IPO later tonight, with a variety of media reports suggesting that the offering is significantly oversubscribed. At the same time, however, Groupon GRPN has not increased its pricing range from the $16-$18 per share it originally indicated on October 21.

This confused me a bit, since oversubscription typically leads to a price range increase, particularly at a company like Groupon that could really use the cash.

So I spoke to some folks knowledgeable about such things, and got a few basic explanations:

1. The “oversubscription” meme might be a bit overblown. Specifically, no company goes out unless it’s at least 2x oversubscribed, since orders can disappear at the last minute. Moreover, the hope is that it’s at least 3x-5x oversubscribed, so that buyers are left wanting a bit (thus pushing things up in the aftermarket). This obviously can cause conflicts between bankers and the company, but bankers typically win that battle.

2. Oversubscription is important, but more important is the quality of subscribers. If it’s a bunch of second-rate institutions that may sell on Day 1 or 2, the company is likely to see a quick spike followed by a big decline/turnover. The key is to get long-term subscribers. And, if those institutions have indicated that they won’t buy at a higher share price, then it’s not worth risking their absence for the sake of an extra $20 or $30 million.

3. Two of those “quality” institutions are Fidelity and T. Rowe Price, but both already have Groupon exposure via private investments. They may buy more, but not nearly as much as they otherwise would have. As such, the pool of quality subscriptions for Groupon may be unusually low – thus prompting it to maintain its price range.

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