Was thinking of writing on this a few days earlier. The spectacular doubling of the share price of LinkedIn from its IPO offer prices as it debuted on public trading at the NYSE has had investors and financial media gushing about a possible new wave of IPOs by social media start-ups. However, there has been little discussion about how the investment banks that managed this IPO shafted and scammed LinkedIn.
For the record, LinkedIn's IPO managers, Morgan Stanely and Bank of America (Merrill Lynch division), fixed its offer price at $45 per share to sell 7.84 million shares, raising $352.8 m for LinkedIn, and valuing the firm at $4.3 bn. The share debuted on NYSE at $83, or 84% higher, touched $120, before closing at $94.25 on the opening day, a gain of almost 110%.
In simple terms, the LinkedIn offer price was hugely under-valued. At the advice of its IPO underwriters, LinkedIn sold itself too cheap. Its investors gains were LinkedIn's loss. And for this rip-off, it paid its IPO managers a cool 7% of the deal as their fee! Furthermore, the IPO gave its managers the perfect opportunity to gift their preferred institutional and other high-value investor clients some easy money (and more business from them in the future). And all this at LinkedIn's expense!
This illustrates the deep malaise with Wall Street and financial markets across the world - limited or no accountability and badly mis-aligned incentives. Where else can you get away with a cool $28 m and assured future business deals, for basically short-changing your employer? Where else are the remuneration structure so completely de-linked from the outcome of the activity? If your remuneration is fixed (at 7% here), irrespective of what happens to the IPO, where is the accountability?
Henry Blodget, who knows as much about these things as anyone around, estimates that the fair offer price should have been $60 per share and therefore LinkedIn lost around $175 m. See also this excellent op-ed by Joe Nocera. See also this Blodget article on how ZipCar's IPO underwriter's Glodman Sachs and JP Morgan screwed the company off $50 m.