I read an interesting piece by Business Insider on the recent IPO of LinkedIn and how their founders and shareholders have been screwed by their underwriters. Bank of America and Morgan Stanley advised the LinkedIn board on their valuation of $45 per share. What seems odd is that after selling these shares to their best institutional clients the night before the float at $45, they immediately started selling at $80 when they went public. So it looks like the business was undervalued ensuring an immediate 90% return for the banks and their customers on the back of the original LinkedIn shareholders.
Ok so the founders and top management didn’t do too badly, even with the company valued at $45 a share, but apparently could have done at least $130m better if the company had floated at $60 per share. This would have still given the institutional investors a good return ahead of the float but at least offered the LinkedIn team a better value. Obviously it is notoriously difficult to value such a company, who would have thought a business like this could obtain 600 times earnings? If I got such a valuation for my company it would put me in the top 100 of the Rich List! As it is I think we are looking at over valuation, especially as there seemed to be a big drop in price as the big investors cashed in early, and today is trading at $88 while hitting a high of $120.
It is probably why back in 2004 Google decided to have its initial offering through an auction so that anyone could participate in the IPO which I understand upset a few banks as they couldn’t look after their ‘special customers’. Maybe that is why Goldman Sachs were cut as underwriters. Even for Google the shares were offered at $85 a share and the public valued it at $100 at the close of the first day, so much more accurate than LinkedIn achieved.
While all these numbers are pretty big, and the UK is unlikely to see this kind of trading, it is worth noting that the old way of doing a stock flotation doesn’t necessarily fit with the new kind of businesses demanding them.