Tuesday, May 24, 2011

The LinkedIn IPO scam?

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.


sai prasad said...

I dont really agree that the price was too low. Every IPO needs to leave a good bit for the Invester and must not attempt to knock off everything for the companies.

In the Indian scenario, SEBI has been contemplating asking merchant bankers to place their track record in the offer document. They want the investors to clearly understand as to how their previous IPOs have fared in respect of listing price.

In most cases we find that the listing price is lower than the offer price.

Personally, I have serious questions about the valuation Linkedin itself.

gulzar said...

yes sir, i do agree that the IPO should leave something in it for the investor. but surely that something cannot be as much as equal to the offer price itself! Blodget's analysis in the link is excellent and self-explanatory.

the heavily onver-subscribed tech IPOs of recent years have given the impression that first-day pops are the determinants of success with an IPO. in this context, a bit of perspective would not be off the mark. IPOs are not lotteries. they are not meant to offer windfall gains to investors. investors' gains should come from their staying invested and from the future performance of the company.

after all, IPOs are primarily a route for companies to raise the maximum possible resources (for future capital investments or for promoters to exit) by tapping their fair market value.

about the indian IPOs, interestingly, the debut listing prices have been far below the offer price. this means that the pendulum swings in the other direction, with companies being rewarded at the expense of investors.

does it mean that offering companies call the shots (over large institutional clients) with IPO underwriters? it may also be a measure of the weakness of investor safeguards in Indian markets.