
How Microsoft avoided the IPO scam that LinkedIn just fell for - yllus
http://yllus.com/2011/05/21/how-microsoft-avoided-the-ipo-scam-that-linkedin-just-fell-for/
======
nikcub
Microsoft closed up ~60% on the first day. At the peak on the first day is was
up more than that (~80% IIRC).

Microsoft did no different to LinkedIn, Gates actually wanted to price the
stock lower to assure that a liquid market would be created. They re-priced
the listing late in the process, just like LinkedIn did.

Most of the Microsoft negotiation with Goldman was about commission charges.

This was all the same thing, both hot stocks who could dictate a lot of their
own terms. The only difference is that we got a good insight into the
Microsoft process via that Fortune article and the only insight we got into
LinkedIn were press releases (most announcing another tilt up in the price)

See my last comment about how list pricing works and why nobody got 'ripped
off':

<http://news.ycombinator.com/item?id=2571248>

~~~
nostromo
I'm not a finance guy </disclaimer>

I think the closing price of the first day is irrelevant, my understanding is
that the opening price is the issue. LNKD started trading above $80 a share,
while the bankers priced the shares at $45 -- a huge delta that means that
their customers realized a large windfall instantaneously and LNKD could have
raised nearly twice the capital at the same dilution.

Compare that to MSFT, which was sold by the company at $21 while the first
trade was $25.50 ([http://blog.seattlepi.com/microsoft/2006/03/16/looking-
back-...](http://blog.seattlepi.com/microsoft/2006/03/16/looking-back-
microsoft-ipo-march-1986/)) -- a much smaller gap.

Once it's on the open market, anything can happen. The issue at hand is if the
bankers low-balled LNKD in order to guarantee huge returns for their
institutional customers, short-changing the company.

A note to all not-yet-public companies: the banks are not on your side.

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dstein64
Here are some details of trading on the day of the offering: "Microsoft had
its initial public offering on March 14th, 1986. Microsoft was initially
priced at $21. However, due to intense demand, the stock first traded at
$25.50. Microsoft peaked the first day at $29.25 The stock closed on the first
day at $27.75. The stock had a volume of over 3.5 million shares, larger than
the 3 million shares offered in the IPO."

Source: Microsoft Stock Split History | eHow.com
[http://www.ehow.com/about_5077008_microsoft-stock-split-
hist...](http://www.ehow.com/about_5077008_microsoft-stock-split-history.html)

~~~
nikcub
Thanks for the source - I had a vague idea of the numbers. I am now trying to
find the first week and month performance, because IIRC it went very very
well.

LinkedIn and Microsoft both listed with similar revenue numbers (adjusted for
inflation, $266M for MSFT vs $240M for LinkedIn) except LinkedIn are growing a
lot faster, and Microsoft had a 35% net margin with no long term debt (almost
all self funded) vs $105M raised by LinkedIn and still in growth/development
stage. Very different market caps at list time, but the market fixed that for
MSFT over the years afterwards

~~~
dstein64
Yahoo Finance has the first week and first month prices. According to Yahoo
Finance, the first day of trading was March 13, 1986, which is one day earlier
than the date that is on the eHow article I linked to. I think March 13 is
correct (it matches the date on a file I found on Microsoft's website for
calculating the value of shares purchased from IPO:
[http://www.microsoft.com/investor/Downloads/Stock%20Informat...](http://www.microsoft.com/investor/Downloads/Stock%20Information/IPOsharecalc.xls))

Here's a link to the Yahoo Finance page I mentioned (prices rounded to quarter
of a dollar):
[http://finance.yahoo.com/q/hp?s=MSFT&a=02&b=13&c...](http://finance.yahoo.com/q/hp?s=MSFT&a=02&b=13&c=1986&d=03&e=12&f=1986&g=d)

According to the numbers on Yahoo Finance, the first week arithmetic return
(relative to IPO price, not the opening trade price) was, at close on March
19: (28.25-21) / 21 = 34.5%, and the first month return was, at close on April
11: (28.75-21) / 21 = 36.9%

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gojomo
I was surprised to learn that Sun, Oracle, and Microsoft went public within
days of each other in March 1986. What a week!

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bhickey
For an industry founded on the bedrock principle that the efficient allocation
of capital is king, IPO mechanics strike me as inefficient: Money on the
table, expensive fixers, etc. Auctions seem like a superficially more
efficient mechanism for pricing an IPO and distributing shares. How about
this:

Solicit bids for shares. After bidding, sell all shares to the bidders for the
highest price at which all shares are sold.

(I suspect that this would also work well for concert tickets.)

~~~
wnoise
And this is essentially how Google IPOed, using a "Dutch" auction.

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lurker19
MSFT's IPO was 25 years ago, at the dawn of the Information Age. LNKD was
post-Google (and post-GOOG) and, well, have access to an automated system for
finding friends of friends who are the best experts in the word on any topic,
including IPO pricing. They have no excuse for leaving so much money on the
table.

------
tomjen3
I have always wondered why the big banks were so eager to work an IPO - surely
there must be more money in playing the market.

Which makes me think: couldn't a company simply get a law firm to write and
file the documents needed? I realize that it would cost a lot of money, but it
must still be cheaper than being taken to the cleaners by the banks.

~~~
flipbrad
Preparing for an IPO is tough enough on senior management at the company as it
is, let alone having to arrange underwriting, vendor placings, etc, without
qualified professionals holding your hand. Lawyers know the law, not the
market.

Also, who would do the pricing (flawed as it may be?)

Also, in the UK, a 'sponsor' (typically, a financial institution, like an
ibank - <http://www.fsa.gov.uk/pages/Doing/UKLA/sponsors/index.shtml>) is very
often required, by law and by stock market listing/trading rules, to be
involved throughout a stock offering to the public. Sensible, or regulatory
capture? It may be a bit of both.

Likewise, it's tricky for lawyers here to advise on the offering of shares to
the public (it's a "regulated activity" per s21 of the Financial Services and
Markets Act 2000 - <http://www.legislation.gov.uk/ukpga/2000/8/section/21> )

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MarkMc
Why couldn't Microsoft say to Goldman: "If the average price on the first day
is more than 30% of what we get, your commission is reduced" ?

~~~
flipbrad
For a setup with conflicts of interest left right and centre, you end up
adding another: a bank wanting to depress the share price once it hits a
threshold. Who, if that were to happen, would buy a share knowing Goldman's
eagle eyes are on it, ready to slap it back down to 30%?

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rudiger
Avoided? Microsoft's stock price went on to increase 600X. Anyone who could
get in on the IPO stood to make millions.

~~~
fragsworth
However, unlike LinkedIn, it took longer than a few minutes on the stock
market.

~~~
rudiger
Microsoft was up nearly 100% on the first day, and closed somewhere around
50-60% up.

