May 21, 2011

"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."
Suppose... 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?”... That...  is what Merrill and Morgan did to LinkedIn.

33 comments:

Chase said...

Was LinkedIn Scammed is the title of the oped you link to.

I don't think so. I believe previous reports that they planned this all along with full knowledge, hoping to make many of themselves and their employees instantly rich.

They did not need to do it that way and it doesn't make it right, but the banks are not the bad guys here.

And I say that with no love for banks.

TS said...

I'd feel stupid that I hadn't done the research and sold the house for more.

edutcher said...

Welcome to the Brave New World of Too Big To Fail and Dodd-Frank.

There's Change You Can Believe In.

PatCA said...

If both parties had the same accurate information, then it's LinkedIn's loss. Bad judgment--or, more probably, they took the risk free money and ran. The bank had the money to purchase the company and to take the risk, right?

MarkG said...

Having IPOs pop like that is not uncommon. Speculators get involved. What it settles back down to is a better indicator of how well it was originally priced.

No one was forced to buy the stock on the opening day. I was immediately suspicious when I saw it was a NYT article.

MarkG said...

Ok, it might be uncommon nowadays, but it's the first "social media" stock.

MarkG said...

Financial markets reporting 101:

If the Dow goes up 20 points (tiny amount) in a day, the media will find a positive story to explain it. If it goes down 20 points instead, a negative story will be used. It's just all bullshit.

George said...

Leave it to the NY Times to (incorrectly) lament what a miscarriage of business justice this is, and using it as yet another opportunity to characterize investment bankers as "pigs". Well, allow me to correctly characterize this deal.

Based on the numbers quoted by the NYT, the mathematically correct analogy here is approximately as follows. You got $1,000,000 for your house that your agent then turned around and sold for $2,000,000...but you were both ecstatically happy and eternally grateful to your agent because you had only paid $45,000 for that house that morning. (They got $352 million for a business that only made $16 million.)

Martin L. Shoemaker said...

Just what this economy needed: Internet Bubble 2.0.

reader_iam said...

What George and Chase said.

tim maguire said...
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tim maguire said...

arkG is right, we won't know for a few weeks whether the opening price was proper or not. But think about this: LinkedIn is currently valued at about 8 billion dollars. They have no revenues to speak of and are unlikely to find any other than advertising. Do you think they're worth 8 billion?

George said...

"Do you think they're worth 8 billion?"

Again, the wrong question and characterization.

Tim, let me ask YOU a question. When you bought your first MacIntosh (or God forbid, the "Lisa") did you ever think Apple would be the world's largest technology company or that that goofy-named Google would be worth 50+ billion? The whole point of a free market system is to take calculated risks. And if you calculate correctly (or are just plain lucky), you might win big.

This has nothing to do with "what's it worth today". It has everything to do with what you think it will be worth some day in the future...AND being willing to bet your money on it.

Ricardo said...

The power of hype. The problem is figuring out which of these will actually do well over the long-term. I remember when Microsoft opened at $21, and hit close to $30 the first day (March 13, 1986). Many thought that the stock was still overpriced when it settled around $25 or $26. The difficult is figuring out which stocks are the (long-term) Microsofts, and which are the flash-in-the-pan bubbles which will later collapse. Personally, I wish I had bought a bunch more Microsoft when it was still in the $20's. But, as my broker says, "Coulda, woulda, shoulda!"

rhhardin said...

Even old stocks used to double in hostile takeovers.

Somebody would offer you double the market price for your stock.

A next-day letter would then arrive from company management saying that the offer does not reflect the true value of the company and under no circumstances to sell.

Everybody then sells to the hostile guy, the hostile guy votes the shares to oust current management, and everybody walks away happy.

There's also the pac-man defense, where the old company launches a counter offer for the hostile company's stock, each company acquiring a majority of the other's stock.

This winds up in the courts, and that's why it's actually a good idea to sell on the open market when you get the original letter.

Maguro said...

Buying Linkedin, a site where people post puffed-up resumes for free, at $94 a share is late 90s internet bubble crazy. I just don't know what to say anymore, these investor types never learn.

Ann Althouse said...

From my perspective, LinkedIn is a spammer. I get email all the time appearing to be from people I know "inviting" me to join LinkedIn. I don't think these people know they are causing email to go to me, so they aren't embarrassed. I have to be embarrassed for them. But they don't know I am embarrassed.

Triangle Man said...

I don't find LinkedIn useful. I put my info in, but rarely log in to check on my "network". As Althouse pointed out, their most visible function is sending unwanted email. Those invitations are either individually entered requests or are sent to addresses slurped in bulk from a contact list.

Rick Caird said...

I wished yesterday that there were puts on LNKD. I wasn't up to shorting, but August 90 puts would be very enticing.

The PE is now 1,389. Seems a might high to me.

MarkG said...

I wonder if it's hard to sell short an IPO stock. In theory, your broker should have "custody" of any stocks you want to short.

avwh said...

This is just an extreme case of how IPO underwriting/pricing works.

The banks don't really take much if any risk; they don't really "underwrite" anything, b/c the pricing is done after the road show, when the banks know what level of interest there is.

Every IPO company wants their stock to do well and be followed; easiest way to do that: have a nice pop in price after the stock starts trading. Every bank wants their "book" of institutional buyers to be happy buyers and keep buying what they offer. Easiest way to do that: have a nice healthy gain in price after the IPO, so the buyers make money.

So both sides are OK with some stock price increase right after the IPO.

Normally, company owners would be upset they left so many $$ on the table in the IPO pricing. But I'd guess LinkedIn owners are not really, since when you get down to it, ANY price is inflated compared to its true current value (based on revenues or profits), since all this pricing is based on social media hype and future value.

JohnnyT1948 said...

A more correct analogy would be if you owned 52 weeks of a mythical timeshare condo where no week had more value than another. If you sold one to a real estate broker for $10,000 and your broker resold it the same day for $20,000 the value of your remaining 51 weeks would have doubled , and you would probably be very happy with the broker. In the case of the LinkedIn IPO, only a small portion of the company was sold, with one of the purposes of the IPO being to value the remaining stock so it can be sold into the market in the future. Thus, the future resale value of the remaining stock of the offering shareholders in the IPO is enhanced.

EDH said...

What the NYT writer doesn't address is what kind of commission Merrill got, if any, from the resale of the stock by favored placement clients who got the benefit of the "pop" after the IPO.

If that commission revenue was less than the 7% that LinkIn paid, wouldn't Merrill stockholders also have a suit against Merrill management for breach of fiduciary duty?

Or, would the business judgment rule prevail, where the good will of helping your company's favored clients might be deemed worth the loss of commission?

Mary Beth said...

If it were my company and I received stock just before it went public, I would prefer that the stock be valued lower so my taxes on it would be lower. Then if and when I sell, I can pay the difference in value. It would be easier to come up with that tax money after the sale than it would now.

Carol_Herman said...

Nope. Didn't buy the stock. But, yes. Forwarded the article to someone in computer software. And, someone else who is retired from Amgen.

Both said they knew of this company. It's not Facebook! But "professionals" are swept in. Not even of their choosing. They find themselves "belonging" to Linky-dink and never, ever, using it!

People in the software field did not fall prey. And, those who sold-short are probably gonna profit. Because they bet on the stock price(s) dropping. They "sell" before they "buy."

Merrill Lynch, meanwhile, shed a few partners along the way. And, I doubt their sales staff made much in the way of profits. On the other hand? If an investor gets taken? Then, Merrill can kiss the account buh-bye.

There's no sympathy button, anyway, for "investors."

And, "one thing is not like the other." (Facebook) Which I don't use, either.

Carol_Herman said...

Oh, yeah. Senators are given first dibs at owning an IPO ... where they don't pay for the stocks. They just throw them in when the market opens.

It's all insider trading, anyway.

Michael said...

Reading commentary on financial matters on this blog is cringe making. Also cringe making to read the NYT article, but that is to be expected. The IPO was clearly mispriced but it is absurd to think that it was deliberate unless it was a calculated decision by the client. There is no accounting for the buy side in a bubble like tech is again enjoying. Think of it this way: the underwriters would be much much wiser to make Linkedin happy so that they could get lots of repeat business for follow on offerings of debt or equity.

S said...

You're not allowed to sell short for something like 30 days after a stock starts trading publicly. Which, I think, is part of the source of this phenomenon - the valuation depends solely on the most optimistic investors.

There is evidence that attributes of a firm that are associated with high initial returns are also associated with uncertainty in initial returns. In other words, there's a risk-reward story here -- people who buy at the offering price get a bigger discount for buying a stock that's harder to value. See Lowry, Officer, and Schwert, "The Variability of IPO Initial Returns", The Journal of Finance 65(2):425-465, 2010.

tim maguire said...

George, thank you for your input, but for your family's sake, I hope you don't do your own investing.

zt said...
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Browndog said...

Normally, I'd address the specific aspects.

However, I think the question is, especially in the age of Obama, and the rise of the leftist:

Is capitalism moral.

Or,is the question--are the individuals engaged in capitalism moral?

luagha said...

I'm in the IT field and have my information up on LinkedIn. (I'm also good at writing resumes, with the assistance of the book 'The Damn Good Resume Guide' which I advise to everyone.)

I have gotten the most well-directed out of the blue interview offers from LinkedIn, by far.

The IT recruiters who use LinkedIn apparently (gasp!) actually read the resumes posted there and have some understanding of the technical issues involved and tailor their job offerings to them. If you have ever used something like monster.com and dice.com and bayareajobs.com, you will know how fabulous this is.

Fred Drinkwater said...

I have to agree with luagha. I'm in tech product development in Silicon Valley, and find Linkedin very useful, for in maintaining my network of colleagues, tracking down people at companies I might want to work for, and direct job opportunities. As he says, it's definitely much better than Monster. The little spam I get from linkedin is a drop in the spam bucket.