Bubble, schmubble – LinkedIn got hosed by their bankers
Posted: May 20, 2011 Filed under: Business Musings | Tags: Facebook, Henry Blodget, Jeff Weiner, Jim Cramer, Jon Stewart, LinkedIn, Reid Hoffman
Yes, LinkedIn (LNKD) went public yesterday. Some important firsts associated with the IPO – first social network to go public, first company that traded on Second Market to transition to the NYSE (or any public exchange for that matter). Big props due to Reid Hoffman, Jeff Weiner, and the entire LinkedIn team, past and present. Contrary to the obligatory kvetching about “another dot.com bubble” – even Jim Cramer is getting into the act! (thank you, Jon Stewart) – LinkedIn is no fly-by-night company. It’s got real revenues, real income, over 100 million users, and it’s taken almost 10 years to bring the company to the point where it was ready to tap the public markets and provide its investors with an appropriate exit and return. So please, enough of the bubble chatter.
There is, however, one area in which this looks just like the 90s – the level at which the bankers priced the stock. The notion of pricing in a “pop” – an expectation that the stock will trade up on opening day – is not new. Investment bankers do this routinely to induce their clients to take the risk on a stock with no trading history. But LinkedIn’s pop was ridiculous – priced at $45, it opened at $80, shot to $120, and closed at $94.25. That means the institutions who bought the shares sold in the IPO (regular folks like you and me never get access to IPO shares unless we’re friends/family of the company) got in excess of a 100% return on their less than one day investment.
Now, I’m a capitalist through and through, and begrudge no one earning a profit, but I’m also a student of the Chicago school – that markets are efficient and security prices reflect complete information (i.e., I don’t know something you don’t know, and if I do, I can’t trade on it because that would be insider trading). But clearly the bankers knew they were massively underpricing the offering (they were marketing the stock to those institutional buyers, so they knew what the demand was), and in so doing, screwed one client – LinkedIn – in favor of other clients – the institutional buyers.
Henry Blodget explains it best – and estimates that the amount LinkedIn lost is about $130 million – so I won’t reinvent the wheel but rather provide you with his analysis. And he of all people should know – he was voted the number one Internet/eCommerce analyst by Institutional Investor in 2000, only to be charged with securities fraud by the SEC in 2003 (http://en.wikipedia.org/wiki/Henry_Blodget).
So, what to do about this? The market for IPOs among bankers is very competitive – they not only make a lot of money in fees, but as the above demonstrates, they are able to offer their best institutional clients extraordinary returns on their investments, thus insuring they remain their best clients. There are no doubt a number of IPOs coming down the pike in the next 12 months, including the big kahuna, Facebook. Let’s hope the management of those companies do their due diligence, dig in the their heels, and make sure they, their companies and their shareholders don’t get hosed.