I’m glad that IPO of LKND is getting some negative attention. If I hired bankers that gave away my shares at half the price that the market decided the stock was worth, I’d be pretty pissed. The fact that most insiders still have shares in the company and watch those shares double on their first day of trading is something that works to calm the outrage. But still.
I have some sympathy for the investment bankers that are in the position of pricing an IPO. There are alot of factors that come into play. Their biggest fear is placing stock with big clients and watching that stock decline, as alot of those shares tend to be tied up, and can’t be sold until a window of time has passed. Therefore, what you see is usually very conservative as far as pricing goes. But while a stock doubling from its IPO price on the first day of trading makes for great headlines, it really is not something to celebrate if you were the one selling your percentage in LinkedIn at that IPO price. From the New York Times:
For a small company with less than $16 million in profits last year, $352 million in the bank sounds pretty wonderful, doesn’t it? But it really wasn’t wonderful at all. When LinkedIn’s shares started trading on the New York Stock Exchange, they opened not at $45, or anywhere near it. The opening price was $83 a share, some 84 percent higher than the I.P.O. price. By the time the clock had struck noon, the stock had vaulted to more than $120 a share, before settling down to $94.25 at the market’s close. The first-day gain was close to 110 percent.
I have no doubt that most everyone at LinkedIn was thrilled to see the run-up; most executives at start-ups usually are. An I.P.O. is an important marker for any company. And, of course, the executives themselves are suddenly rich. But, in reality, LinkedIn was scammed by its bankers.
The fact that the stock more than doubled on its first day of trading — something the investment bankers, with their fingers on the pulse of the market, absolutely must have known would happen — means that hundreds of millions of additional dollars that should have gone to LinkedIn wound up in the hands of investors that Morgan Stanley and Merrill Lynch wanted to do favors for. Most of those investors, I guarantee, sold the stock during the morning run-up. It’s the easiest money you can make on Wall Street.
As Eric Tilenius, the general manager of Zynga, wrote on Facebook: “A huge opening-day pop is not a sign of a successful I.P.O., but rather a massively mispriced one. Bankers are rewarding their friends and themselves instead of doing their fiduciary duty to their clients.”
There is nothing wrong with a small “pop” in the aftermath of an I.P.O.; investors, after all, don’t want to buy a stock that is going to go down immediately. But during the Internet bubble of the 1990s, the phenomenon of investment bankers wildly underpricing I.P.O.’s so that money could be diverted to favored investors got completely out of hand — stocks would sometimes rise 500 percent on the first day. It was obscene.
Indeed, most business journalists writing about the LinkedIn deal focused on the first-day run-up as evidence that we’ve entered another Internet bubble. But over at the Business Insider blog, Henry Blodget — who knows a thing or two about bad behavior on Wall Street — had the perfect analogy for what the banks had done to LinkedIn.
Suppose, he wrote, your trusted real estate agent persuaded you to sell your house for $1 million. Then, the next day, the same agent sold the same house for the new owner for $2 million. “How would you feel if your agent did that?” he asked. That, he concluded, is what Merrill and Morgan did to LinkedIn.
Google addressed this issue when they went public by holding a Dutch Auction. The initial offering of shares was sold for $85 a piece. The public valued it at $100.34 at the close of the first day of trading, which saw 22,351,900 shares change hands. (source Wikipedia)
It’ll be interesting to see what Facebook and some of the other Internet stocks that are next on the public offering block do. Will they spurn the traditional route?
If you don’t get the reference in the post’s title, it’s from The Wire:
I’ve gotta ask you: if every time Snot Boogie would grab the money and run away… why’d you even let him in the game?
Got to… this is America man.
(slightly NSFW)