Thursday, May 19, 2011

Linked in First Trade, $175 million gift

LinkedIn, which was founded in 2003. has begin trading its shares, under the symbol LNKD, on the New York Stock Exchange this morning. As we learned yesterday, LinkedIn priced its IPO at $45 per share, giving the company a valuation of $4.5 billion. Today, the company began trading at $83.00 per share, a 84 percent increase from $45 per share. That’s a $7.8 billion market cap. It’s now up to $90 per share, LinkedIn is offering a total of 7,840,000 shares and is looking to raise as much as $406 million in the offering. Currently there are 94.5 million shares outstanding plus 1,176,000 shares to cover over-allotments. If the company sold the over allotment, LinkedIn’s valuation could be as high as $8.5 billion.

This is the the biggest U.S. Internet IPO since Google. Yes, that’s right. LinkedIn, which barely made $15 million in earnings last year, is worth about $8.5 billion.

Let me be more clear on this, LinkedIn’s IPO, which priced last night at $45 a share, now has doubled in early trading, up to $90 a share.

LinkedIn's underwriters, Morgan Stanley, Bank of America, just fooled the company and its shareholders to the tune of an astounding $175 million. By wildly underpricing the deal and selling LinkedIn's stock to institutional clients way too cheaply.

LinkedIn's stock was trading above $80+ a share earlier this morning. Bank of America and Morgan Stanley sold the same stock to their best institutional clients at $45 a share last night. The value of LinkedIn-the-company, it seems safe to say, has not appreciated by 90%+ in the past 12 hours. And that means that, on its underwriters' advice, LinkedIn sold its stock way too cheaply. It also means that the institutional investors who bought LinkedIn's stock last night are high-fiving each other this morning, celebrating their instantaneous 90% gain. (Lots of them are probably also selling some stock).

By underpricing the stock, Morgan and BOFA gave their best institutional clients a gift of at least $175 million this morning. And that money came right out of LinkedIn's pockets and the pockets of the LinkedIn shareholders who sold on the deal.

(Specifically, assuming a fairer price for the stock would have been about $60, LinkedIn probably left about $130 million on the table. LinkedIn's selling shareholders, meanwhile, left about $50 million.)

And the best part of this screwing is the fact that LinkedIn probably has no idea it got screwed. In fact, the company is probably thrilled with the IPO result. Why? Because they've been told for so long, by so many people, that having a big "first day pop" is what every company should pray for in their IPO.

But it isn't.

Here's a simple analogy:

Imagine if the trusted real-estate agent you hired to sell your house persuaded you to sell it to her best client for $1,000,000 by telling you this was the best price she could get. And then, the next morning, the person who bought your house immediately turned around and sold it for $2,000,000 (using the agent to sell it, naturally).

And it's also true that underwriters should always try to modestly underprice deals, to the tune of a 10%-15% "IPO discount." They do this to reward institutions for taking the risk of analyzing and buying the stock of an unproven company. If there were no discount on IPOs, there would be little incentive for big investors to play ball before the offering: They'd just wait until the stock started trading and buy it then. This, in turn, would make it harder for companies to raise capital. So the modest discount, in which companies and underwriters reward investors with a good deal, makes sense.

But there's a huge difference between at 10%-15% IPO discount and a ~50% discount, which is what LinkedIn's IPO just sold for. The institutions that bought the LinkedIn stock last night are now 100% richer, just by virtue of being good clients of BOFA and Morgan. And that money came right out of the pockets of LinkedIn and the LinkedIn investors who sold on the deal.

If LinkedIn can sustain a price above, say, $75 a share, BOFA and Morgan should have sold it to institutions at $60. Because the stock was instead sold at $45, LinkedIn and its existing investors just got screwed to the tune of $175 million.

While this makes LinkedIn look like the greatest thing there are a couple of huge caution flags in this monster opening jump, One, the underwriters left a LOT of money on the table. Given this level of demand for LinkedIn stock, this IPO could have been priced much, much higher.

That would have meant more money into the coffers of LinkedIn, rather than into the pockets of the investment community. At $90 a share, LinkedIn and its selling stockholders would have raised $705 million rather than $352.8 million.

Second, the LinkedIn stock debut must raise huge questions about the private markets for selling shares in LinkedIn, Facebook, Twitter and other non-public companies. Shares of LinkedIn on those thinly traded markets such as SharesPost valued the company at $2.5 billion. If the private market valuations are off by so much, how much can we trust them?

This is the perfect scenario to see if a new bubble is being created or if it pays off to be a big client of Morgan and BOFA, at the end of the line, clients will always keep coming back for more.I really want to see the happy ending of this until then... keep writting, keep investing, 1 Million euros in less than 5 years let's make it happen.


  1. I read your blog. I like it. Linked will likely hold onto most of its gains by the time the market closes today.

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  2. nice blog.Let me be more clear on this, LinkedIn’s IPO, which priced last night.
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