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Are You Really Getting a Good Deal with Groupon?

06.24.11

Groupon announced on Jun. 2, 2011 that it would be going public.  It is rumored that the long-awaited IPO could possibly raise around $3 billion.  That size of IPO would give the social buying site a v aluation estimated at $30 billion, a stark difference from the $5 billion that Google offered to purchase it for just months ago. 

And that’s not the only interesting aspect of the IPO.  Following the likes of LinkedIn, Renren and Google, Groupon also announced that it will use a dual-class share structure. In its SEC filing, Groupon disclosed that while co-founder and chief executive officer Andrew Mason only owns 7.7% of the company’s Class A stock, he additionally owns 41.7% of Groupon’s Class B stock.  Eric Lefkovsky, another co-founder, owns another 41.7% of the Class B Stock.  While the rights of the Class B shares were not disclosed in the filing, they typically allow founders to retain control, through greater voting power, of the company while still having shares traded in the public market.

With the recent announcements of both LinkedIn (see our earlier post) and Groupon using the dual-class share structure, we can see that investors and owners have strong opinions, both positive and negative, about this corporate governance structure. 

To most investors, two classes of shares are simply seen as unfair.  By creating a class of shareholders with super-voting rights, power is given to a select group of shareholders.  Typically, senior management is part of the higher voting power class, so there may be less accountability to the publicly traded class, and certainly the publicly traded class has less of a voice.  Dual-class IPOs also tend to be priced at lower price-per-earnings and price-per-sales ratios than comparable single-class IPOs. In addition, research shows that shareholders with super-voting rights dislike raising cash through the sale of additional shares or using shares as currency for acquisitions because this might dilute their voting power influence. Thus, these companies may tend to have more debt than companies with single-class structures.  Consequently, this research also shows that shares of companies with dual-class structures underperform the stock market.

Nevertheless, the dual-class share structure does have its benefits, at least from a management and founder perspective.  Many praise it because it allows management to ignore all kinds of short and medium-term noise in the market to which most public companies fall prey.  Thus,  the dual-class structure allows managers to create and follow long-term goals that can in turn create long-term value.  Additionally, this structure can prevent hostile takeovers that may bring an end to any opportunity of a long-term franchise.  All in all, if both classes of shareholders’ goals are aligned, long-term success might be more likely than with a single-class structure.

OUR TAKE: An IPO with dual-class share structures presents a host of benefits and challenges for investors and founders/owners alike.  When considering an IPO, companies should know their options and weigh the good and bad to determine which structure will best set their company on a positive trajectory.  This decision will not only make a long-term impact in how the company operates, but likely also its success.  Investors must weigh the impact of a super-class of stock, and the resulting lack of control, against potential long-term benefits.

*Many thanks to Lamar Dowling, a Gardere summer associate and JD/MBA student at Southern Methodist University, for his contributions to this post.

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