Linkedin was the stock du jour last week when it became the first social network to release an IPO. Its shares, first priced at $45 on Thursday, reached as high as $120.70 before closing Friday at $93.09. In early trading this morning, the shares took another 9 percent hit, selling for just $84.
That’s still a great deal for investors who got in at the very beginning and almost doubled their money already. As the New York Times points out, however, it’s not a great deal for Linkedin itself, which may have sold its stock too cheaply. Stocks do not generally double in value in under twelve hours.
Unless Linkedin was scammed by the companies that underwrote the deal.
By selling the stock to their favored clients at $45, then watching it soar to $90, they earned those clients $175 million, which would otherwise have gone to Linkedin itself. According to Eric Tilenius, general manager of Zynga: “A huge opening-day pop is not a sign of a successful I.P.O., but rather a massively mispriced one.” He’s one to know, as many people are eagerly awaiting Zynga’s own IPO.
Henry Blodget writes that it is common for underwriters to value the stock slightly below its value, but that means 10 to 15 percent, not 50 percent. That leaves only two options when trying to understand the unprecedented surge: Either the fabled Titans of Wall Street—Merrill Lynch, Morgan Stanley, and Bank of America—had no idea what they were doing when they valued the initial stock, or they knew exactly what they were doing. In the latter case it means that they chose to stiff Linkedin to benefit their clients.
Of course, not everyone attributes malicious intent to the Wall Street pros. The Epicurean Dealmaker, a blog written by an anonymous investment banker, points out that Linkedin only sold a small fraction of its stock, while still maintaining control over most of it. Nor did the company, with $100 million on its balance sheets, need the money that it raised through the sale of stocks.
Finally, he points out that even the greatest minds on Wall Street had no basis on which to evaluate the stock in the first place. “Let me make this perfectly clear,” he writes. “Investment banks do not set the ultimate price for IPOs; the market does” He lets us in on what he calls “a little secret: Morgan Stanley and Bank of America Merrill Lynch think people who bought LinkedIn shares at $90 or more are nuts.”
Linkedin was the first of the new Silicon Valley social media superstars to release an IPO. Many more are yet to follow, including Zynga, Groupon, and the much anticipated Facebook IPO. The Epicurean Dealmaker argues that “LinkedIn’s price performance guarantees that future social networking IPOs will come at stratospheric initial valuations.”
That may well be the case, but the current shareholders in these companies would still do well to ensure that they get the most out of their stock, rather than leaving it to the underwriters’ buddies. Chances are that they will. And if today’s stock prices are any indication, what goes up must necessarily come down.
Read More at Yahoo News.
Read More at Business Insider.
Read More at the New York Times.
Read More at the Business Journal.
Read More at the Epicurean Dealmaker.