Hacker News new | past | comments | ask | show | jobs | submit login
Was LinkedIn Scammed? (nytimes.com)
393 points by mmastrac on May 21, 2011 | hide | past | web | favorite | 100 comments



The underwriters also have a responsibility to all involved not to over price the ipo to take advantage of transient demand. If they do, and the stock ends up under water within a few days to months they run a serious risk of pissing off both their investing clients and the newly public company. Opening down or trading below what the stock priced at in the short term has a strong stigma attached to it and can make retail and institutional investors think there is something systemically wrong with the company regardless of the fundamentals.

There was an editorial in the WSJ on friday that strongly suggested the price action in LNKD has to do with the current easy credit environment driving money into riskier assets. I agree this seems likely. Certainly it seems difficult to justify the valuation on any traditional metric. If when pricing the ipo Morgan also felt that any frothy demand was based more on the easing environment than real interest in LNKD as a company, perhaps they were right to hold the pricing a bit more conservative than the market was suggesting.

After all, they already had increased it by almost 33%, and the current QE program is scheduled to shut down in June. Many smart people appear to be betting on interest rates climbing after the program ends, that may take enough money out of the market to cause someone like LNKD to correct.

Another thing to keep in mind is that LNKD offered a relatively small amount of stock as compared to many offerings. This kept supply low and could have contributed to the large pop, but also means that they probably have plenty available for a potential secondary offering, which could allow them to profit from these very price moves down the line,


Opening down or trading below what the stock priced at in the short term has a strong stigma attached to it and can make retail and institutional investors think there is something systemically wrong with the company regardless of the fundamentals.

I understand there's a stigma, but why does the stigma exist? Let's just assume that the investment bank's only goal is to accurately predict the demand for a new IPO, and to set the offer price accordingly; why is overpredicting demand stigmatized whereas underpredicting is not?


"Let's just assume that the investment bank's only goal is to accurately predict the demand for a new IPO"

I'd say that their main goal is to make sure that the shares are all sold at a price that everyone is happy with - the management team of the company going public is heavily involved in all the steps on an IPO.

Like taking VC money, nobody makes you go public and both are things to do with your eyes wide open.


Well, there's the SEC.


technically speaking the SEC does not force you to go public.

The problem most people refer to: if you have over 500 shareholders of record, you have to make a lengthy filing which is almost as onerous as going public. Hence, since the incremental effort isn't that much, most companies in that position go public. There's technically no compulsion to do so.


Because overpricing makes it look like there is a lack of interest which is a terrible appearance for anything, really.


Often the underwriters will have to buy the stock at the price they set (it costs the bank money in that case) also it means the company may have failed to raise the funds they had planned to with the offering.


The same way that selling someone a house for $1 million and the next day it's worth $900K looks bad on the seller since they're promoting it as a good investment.


If I sold a house to someone for 200,000 and they told me it was a good deal, I'd be very irate to find that they'd turned around and sold it for 400,000 the next day.


This analogy isn't correct - and I am surprised that there are experts using it in their analysis.

It would be like selling 10 of the bricks from the house for $10, and then the guy you sell them to turns around and sells them for $20. Far from being upset, you now realize that the remainder of your 150 bricks just doubled in value.

To complicate the analogy further, you would need to sell 10 bricks to 10 different people and spend a month negotiating the price to a point where everybody agrees on the same price - which is the problem with an IPO.

There are even further complications with LinkedIn in particular, but needless to say the analogy falls apart very quickly.


But I tore down that wall and sold those 10 bricks so I could build an addition to house the 5 new kids I'd like to have soon and grow my family.

It's not as important that my remaining 150 bricks are more valuable. I can't sell those right now. But I could have built an addition 2X the size if I had gotten 2X cash for the bricks I sold.


Sure, but you built the house for a few grand.

I can't imagine the LNKD investors are too disappointed about a $300+ million payday.


Who cares how much the cost to you was? All that matters is the market price, and you were lied to about that.

>> I can't imagine the LNKD investors are too disappointed about a $300+ million payday. <<

That is exactly the sort of cavalier attitude folks on wall street display when these issues persist - "who cares, we made you a lot of money didn't we?". When in fact their responsibility is to try and find the most accurate price and minimize risk to the underwriters.

The thing is like others have mentioned, there is a degree of "buyer beware" going on here. Its not like LinkedIn had no clue about the market situation. They probably had a staff of ex-bankers (like most tech companies do) help them price the offering too.

It's just the nature of the beast. Taking companies public is an oligopolistic business and till we figure out alternative ways of doing this (a-la google tried) this is going to be a perennial problem.


> All that matters is the market price, and you were lied to about that.

There isn't a "market price" until it goes on the market. Nothing prevented LinkedIn from having their own experts (and I suspect they did) weigh in on the proper price.


I'd be a little bothered with $300 million if I could have had close to $600 million instead - especially knowing that the difference went to the middle-men in the deal.


The middle-men (investment bankers, in this case) didn't make the $300 million profit - they sold it to people who manage money, that made the profit.

Typically, the biggest blocks of money for IPO investing will be institutional investors : meaning that the actual beneficiaries will be the pension funds, and investment funds of regular people.

The sources of profit to 'Wall Street' are the 7% underwriting fee (which is an enduring travesty, IMO) and performance fees on the managed money (which get a boost because the underlying fund appreciated step-wise).

Regular performance fees are mostly related just to the size of the fund (approximately 1%) - so the effect of the IPO jump on an overall fund will be negligible. However, individual managers potentially benefit indirectly because their performance relative to their peers would improve, and they may be able to get bigger portfolios to manage (which is the big win for an institutional money manager).

If the IPO buyers were hedge-funds, then they would benefit from a 20% performance kicker (which is why people at hedgefunds can be very handsomely rewarded). OTOH, the hedgefund investors would likely just be 'flipping' the shares within a couple of days - so they're less attractive/stable initial holders than the investment banks would ideally like for a 'solid' IPO.


They certainly made their pile, so I guess they're not 'unhappy', but still, it just seems that the only sensible thing to do would be to use a market to determine prices. That's what they're there for, right?


Also: with all the 'blah blah' that you hear about companies taking uncomfortable decisions due to a "fiduciary duty to shareholders to maximize profits", taking this sort of hit seems quite askance.


Isn't that what happened?


Obviously not. Someone at the investment bank pulled a price out of their ass, which was what the shares were initially quoted at. They subsequently rose a great deal on the actual market.

I'm not a market "fundamentalist", but they're an awfully good way of pricing things in many circumstances compared to the central planning approach of having several experts decided on a price.

I'm no economist, but I'm sure a clever one could find a good way to auction off IPO shares to get the best deal possible for the company.


GOOG did, remember.


> Someone at the investment bank pulled a price out of their ass...

It's an IPO, and the first social media network to do one. New territory, doubly so. Of course they pulled a price out of their asses.

If LinkedIn didn't like that price, they'd have gone elsewhere. They didn't. They could've affected the price, too, or chosen an auction.


The factors you've mentioned should have been already priced by Morgan in the opening price proposal (low share supply, low interest rates etc). They are reasons which justify why the shares traded so high, which in turn proves that it was foreseeable by Morgan to know that.


I just woke up so I'm not sure if I'm conveying my point well. My suggestion is that these factors can combine to create a short term unsustainable pricing situation. If Morgan Stanley believes in their heart of hearts that the stock won't be able to support more than a $50 price by Aug 1, they should be loathe to price at $80 and see it fall. This won't just kill their ability to get future offerings subscribed, but also can weigh heavily on the trading of the stock long term which could easily get in the way of any secondary offerings.

Besides, who can say that they actually could have floated the stock at $80? Just because some retail investors or momentum traders bought at $80-$100 on the first day doesn't mean they could have moved the whole volume of stock at that level, especially to some of their institutional clients. Just because you could potentially find one guy out there to buy one share of LNKD at $1000 doesn't mean it's a reasonable price for it or that you could find anyone to buy 100,000 shares at $1000 - but you could still get a print off of that one share transaction.

None of this is meant to say that I trust investment banking firms a lick, or I'm sure Morgan did the right thing here. I'm just trying to suggest that it's a much more complicated situation than the NYT and the Zynga sound bite might suggest.


> If Morgan Stanley believes in their heart of hearts that the stock won't be able to support more than a $50 price by Aug 1

I think it's a bit absurd that these prices aren't somehow determined by...say... a market rather than what a few guys at a bank "believe". Isn't that sort of the whole point?


> I think it's a bit absurd that these prices aren't somehow determined by...say... a market rather than what a few guys at a bank "believe".

All a market is is what the participants believe. LinkedIn was not forced to do this through Morgan Stanley. I am sure they shopped offers at all the big investment banks. There is a market for underwriting IPOs, and there is a market for the actual public shares after the offering.


This won't just kill their ability to get future offerings subscribed, but also can weigh heavily on the trading of the stock long term which could easily get in the way of any secondary offerings.

Wrong. Underpriced IPOs (almost all of them) have been welfare for well-connected friends-of-investment-wankers for quite some time. The idea that banks would have trouble allocating public offerings is laughable.

The claim that banks need to underprice IPOs for some systemic reason is laughable. It's a back-filling rationalization for spinning, which would otherwise rightly have bankers in federal PMITA prison.


I'm not going to disagree with you that there are bad things that go on with IPO allocations. But I think you misunderstand - I'm not saying investment banks are required to underprice IPO's to get them fully subscribed, but clearly they need to avoid over pricing the shares if they expect to keep selling them. I think you have a fundamental misunderstanding of the process if you believe that Morgan could consistently over price new offerings and subsequently see them fail/go under water and yet still be able to keep selling these over priced issuances to their clients and institutions.


I think they should fairly price the IPO, not overprice it.


You are looking at the market price today. Morgan Stanley's consideration is the market price in the future.

I believe the market price today is overvalued, and it will come down in the future.


> The factors you've mentioned should have been already priced by Morgan in the opening price proposal (low share supply, low interest rates etc). They are reasons which justify why the shares traded so high, which in turn proves that it was foreseeable by Morgan to know that.

Hindsight's 20/20. We could just as easily be sitting here weighing up all the information Morgan Stanley had that should have told them not to give such a high valuation.


What makes the overpricing stigma more rational than the lack of stigma in underpricing? There's a huge gray area here between $45 and the $85 open that speaks to credibility, and I don't think anybody's saying it should have been priced at $90+ just because it popped to $140.


Having worked in the industry for a long time I have no doubt that Invest Banking Firms are greedy fucking bastards.

However, in this situation it is more a case of damned if they did and damned if they didn't.

Before the IPO there was a fair amount of nervousness about a big launch of yet another dot com. It is easy to look at this with the benefit of hindsight and say - they should have known the share price would more than double but I doubt they purposely got it that wrong.


Am I the only one who feels that if I'd put in the blood, sweat and tears to build a company to the point where it could be IPO'd I'd be more likely to gouge my eye out with a rusty spoon that open it to the sharks, sociopaths, speculators and manipulators of wall st and the open market?


You're probably not along. At the same time, I believe significant number of people (myself included) will respectfully deem this view too gloomy and pessimistic. One could probably use the same logic arguing about the first (or second, ...) round of VC financing.

In each case, you are relaxing some control of your company in exchange for something else valuable: other people's money. Whether such exchange is fair or not depends on specific circumstances; each side can always ask for more (money, control) to make the exchange fair.

I don't know of any company of any significant size (e.g. with >$100M of annual revenue) that hasn't made such an exchange at some point in its history.


There are hundred of companies that meet your criteria and dozens with sales in the billions. A few I can think of off the top of my head: M&M/Mars - owned by 3 siblings, Koch industries - owned by two brothers, and Bechtel. They are family owned businesses with a penchant for secrecy.

Edit: From another story on the home page right now - Red Bull $5B in sales


Thank you for setting me straight. Of course there are many privately-held companies that existed for decades and never took public money.

I would bet that most of these companies were created decades ago and that most of the recent "success stories" took public money at some point - anybody knows any examples?


There's a big difference between a VC round and the open market. The markets are often not driven by anything even related to the companies whose valuations fluctuate wildly by billions of dollars in under a second. They don't open to you (to same degree) to hostile takeovers, pump-dump schemes and naked short attacks. They force companies to kowtow to the opinionated whims of unaccountable analysts and focus on short term profits over long term strategy.


I'm sorry, but I don't see why people are so hostile to trading in the open market.

The public stock market is a real-time debate about valuation in the open. The VCs do it behind closed doors. Being critical of the markets for being divorced from reality is fine, but surely having a public stock price is better than having it all hidden from view?

If you're not a fan of more openness, maybe you are hoping to 'pick off' a VC who over-values your company, away from a public analysis of its actual worth?

As for having a public listing forcing a company to do anything - it's not true at all (except for publishing audited accounts). The company is free to ignore the gyrations of the market, and keep its plans secret too.


An IPO is the act of selling your business to the public. You are definitely not the only one who may prefer to stay private. It's a business decision the each individual business faces.


Cargill. 2009 revenues of $116 billion. (That's declared revenue.)

Is, was, and will be privately held for the forseeable future.


IPOs are good for the ego because it allows founders to liquidate their equity without selling control of the company to someone else. You will need to cash out eventually. Dividends may not be lucrative enough.

Also, eventually your employees with stock options and investers will want to see liquidity to stick with you.

Finally, you may not have a choice. A company must become public after it has 500 shareholders. This can happen if you have enough investors and enough employees exercising their options early (presumably because they have left the company).


One of the reasons LinkedIn's share price jumped so high from its IPO price of $45 was because of a very low float. There are too few LinkedIn shares trading on the public market. It is not that easy to get your hands on LinkedIn shares right now, even if you are willing to pay market price. This artificially raises the stock price.

I believe 7 million shares were floated out of ~94 million outstanding shares. If more shares are floated, the price per share should go down (not considering other factors) as there will be a larger supply of shares in the public market. The assessment that the investment banks that the IPO should be priced at $45 sounds more reasonable had all 94 million shares been floated (speaking hypothetically; this never actually happens).

For this reason, valuing LinkedIn by multiplying 94 million (total outstanding shares) by the current stock price on the NYSE (as most news articles have been doing) is probably not a very accurate measure.


But that would mean that the investors didn't know how to do math. Everybody that buys knows what percentage of the company they're supposedly are overpaying for.


There are too few LinkedIn shares trading on the public market. It is not that easy to get your hands on LinkedIn shares right now, even if you are willing to pay market price. This artificially raises the stock price.

Not really true. If you want to buy or sell a million shares right now, you're probably going to see that effect-- it's called "slippage" and occurs when you trade any stock in large quantity, but the market self-corrects soon after. At a few hundred or thousand shares for a decently liquid stock, slippage is not a real concern and the only cost of trading is the bid-ask spread, which is usually a penny or two.


Someone's wrong on the internet...must avoid spending time correcting them


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...

No, this is an absurd claim. Investment bankers are not clairvoyant.


Right. This is reminiscent of the famous line about what your accountant is supposed to say when someone asks him about profit.

  Profit? Who's askin'?

  - If it's a customer, you're making a little bit of profit.
  - If it's an investor, you're making a LOT of profit.
  - And if it's the government, you're making no profit at all.
Joe Nocera wants everyone to make just a little bit of profit. If they make too much, he's calling for a Congressional investigation. And if they make too little...he's calling for a bailout:

  http://www.nytimes.com/2009/01/24/business/24nocera.html
  
  Most important, the government has made clear it will not  
  allow a major bank to default, to avoid the replay of the 
  Lehman catastrophe.
Nocera is one of the guilty parties in the prestige press who propounded the "too big to fail" mythology. Now sovereign defaults are on the horizon, in part because we didn't let banks that made bad bets simply go into bankruptcy. His observations about banks should therefore be taken with a grain of salt.


Too big to fail is _not_ a fallacy. The knock-ons from the failures of Lehman and Bear Stearns were very visible. In Europe, the knock-ons from the failure of Kaupthing and Landsbanki were too, and they only ended up affecting insitutional investors as retail depositors got government protection.

AIG failing would have caused an investor panic across banking as a whole due to their position as the leading insurer of investment risk.

In the UK, Lloyds TSB and RBS (two of the 'big four' UK banks) both very nearly collapsed; the smaller Northern Rock bank did collapse and had to become 100% government owned. The alternative in each case was depositors having their assets frozen for a long period with only the promise of pennies on the pound a long time later, with a knock-on loss of confidence for the sector, combined with a large compensation bill for the taxpayers. Would you _really_ like to see what that happens when 20% of the banking market suddenly freezes?


Yes. Because the alternative -- which we are currently seeing unfold -- is a wave of sovereign default, starting with the PIIGS and ultimately taking out the USD as the world's reserve currency.

...I should add that Northern Rock did not have to be nationalized, nor should taxpayers be obliged to pay any kind of compensation bill. Bankruptcies can and must happen to clean out the dead wood.


UK law provides taxpayer backed guarantees to a fixed balance per saver per bank; if NR had been allowed to collapse the UK taxpayer would've been on the hook for that amount.

And I agree that bankrupticies must be possible and are a good thing for businesses as a whole; Too Big To Fail explicitly works against this. NR was big enough regioinally that it'd have caused major economic damage to that (already fragile) region had it been allowed to go down.


Nocera is one of the guilty parties in the prestige press who propounded the "too big to fail" mythology.

But the quote you cite is of him observing the government's behavior - accurately - not prescribing what the government should do, or evidence of the government following his suggestions.


Read the full article. He's clearly positive on the bailout and explicitly says the government's first reaction about how to "save" the banks was the "right one".

  Case in point, it turns out, is the banking crisis. It 
  sure looks like the government’s first impression about     
  how to save the banks was the right one, after all
And here is that quote in context:

  Thanks largely to actions taken by the Federal Reserve, 
  the commercial paper market has thawed, and banks are 
  lending to each other again — if not to the rest of us. 
  Customers aren’t racing to pull their money out of the 
  banking system and stuff it under a mattress.

  Most important, the government has made clear it will not 
  allow a major bank to default, to avoid the replay of the 
  Lehman catastrophe. (Though it would have been nice if Mr. 
  Geithner, who had been involved as head of the New York 
  Fed, had acknowledged that the Lehman default was a 
  terrible mistake. Instead, he fell back on the old “there 
  was nothing we could do” dodge. Not exactly confidence-
  inspiring.) The government showed its determination to 
  stick by this thinking when it rushed in to shore up the 
  faltering Bank of America.
That is a highly supportive take on the bailout, at the time it was happening.


So, not malice, but incompetence? It's their job to know, and if they are wrong by about a factor of two...


I don't think you can be prosecuted for guessing wrong. Otherwise weather reporting would be really risky business...

edit: presuming your client understood you were guessing. If you pretended to KNOW and were guessing, you could be prosecuted then.


Prior to the IPO, everyone was saying $45 was absurdly high. Now it's absurdly low.


This is a good point. Of course - for a banker it is not an opinion it is a full time job and at 7% they are very well compensated for it.


Goldman evidently thought it was overvalued, too. They sold all of their stock at the IPO price. So if their goal was to "scam" LinkedIn, they didn't do a very good job of it. http://finance.fortune.cnn.com/2011/05/19/goldman-leaves-lin...


Who do the company's financial executives serve during an IPO, when the identity of the investors is changing fast?

Let's not forget that the point of an IPO is to (a) provide an exit for the startup investors. (b) raise funds for the company's future operations (c) make the company's financial executives and founders rich.

Who loses when the offering price is lowballed? Everybody who sold shares into the offering. That's the first two of my list. Usually the insiders have a six-month lockup; usually they can't sell their own shares until six months after the IPO. So, if the shares hold their price the execs will do well.

There's a big PR penalty if the stock drops below the opening price. That will turn into a money penalty on the execs in six months unless the company can overcome it.

So, the smart bet for self-interested execs is to lowball the offering price. As long as the startup investors don't call foul, the only loser is the company itself.

If I were an investor, I'd insist on the execs giving me (selling me cheap) options to buy half their shares at the opening price, as an incentive for them to price the offering right.


I like Henry (Joe...not so much), but they are being idiots. Pricing an IPO is not quite that easy. And a 100% pop is not the end of the world for the company. In fact it is pretty neat.

Henry's analogy is asinine. Better is the owner of a 10 unit building renting to a tenant for $1000 who turns around and rents for $2000. The owner, without doing anything, has just increased the value of his building by 90%.


Google's Dutch auction IPO pricing looks even more appealing after seeing this. Too bad it took a recession for them to get the bargaining power to demand a Dutch auction.


I do not think it is a matter of LinkedIn lacking bargaining power. It is a well known company and it is the first social company to go IPO, so every bank will be eager to underwrite them so that they can say they are the experts of social. They could have had a dutch auction if they really wanted one.

I think the reason they did not go with a Dutch auction is they lack the confidence of Larry and Sergey. What if it fails? What if the bankers get pissed off and sabotage it by not working hard enough to sell the issue.

Having the price jump by 100% may be leaving money on the table but it is not a disaster. Having the IPO fail would be a disaster, and the management of LinkedIn would be personally blamed for it.


What if the bankers get pissed off and sabotage it by not working hard enough to sell the issue.

Have things become so bad that companies must ingratiate themselves with 40-50% tributes to the banks?


Have things become so bad that companies must ingratiate themselves with 40-50% tributes to the banks?

I hate investment wankers with a passion and would love to see the people involved in IPO spinning get the Paris 1793 treatment. But the "40-50% tribute" claim is not correct. LinkedIn only offered about 7% of its stock, so it was only a 3-4% tribute.

Knowing how scummy banks are surrounding IPOs, this was a very intelligent strategy. Now the stock can trade to a fair level and then they can do a secondary offering at a real price.


I think the grandparent was referring to the theory that bankers may intentionally underprice the issue so that they could extract some of the benefit from the underpricing.

So for example, in the case of LinkedIn, the theory is that the bankers knew that the shares could go for 100% higher price than the IPO price and sold those shares to their buddies at a much lower price with the understanding that their buddies would pay them back a percentage of the money they make flipping the shares by doing various other business with the banks.

Of course none of this is proven, but it is a theory many serious people have.


Seems like a great topic for a NYTimes business-section infographic:

Which underwriters price IPOs most accurately and which ones leave huge amounts of their clients' money on the table?


Not a scam. Inflammatory banks are evil stuff with little to no support.

In hindsight it's easy to say they should have known it would get to this price but in the weeks leading up to the IPO it would have been pretty difficult to justify pricing at 80. The current price is difficult to justify and may not hold beyond this initial frothy period.

Add to that the greater downside of underpricing and I just don't think the author is really making much sense.


I was initially on the "scammed or at least poorly served" side, but then someone with more experience in these things than me pointed out that the shares the traded hands in the IPO were a smaller fraction of the company. If you sell 10% of the company at at 50% discount, you've actually only given away 5% of the total value of the company, and you've gained a huge marketing win.

Also, for reasons that seem irrational to me, I'm told institutional investors consider it a strong indicator things are going downhill if a stock ever trades below it's offering price.


It is also possible that no matter how the opening price was, people were going to gobble it up anyways.

Like others pointed out, the price slowly grew from $25, $35 and finally $45. I had placed a limit buy order for $47, and it opened at $85.

If there are any finance folks here, I have a question - who set the $85 price? Was it the underwriters? It could not have been the market because the stock started trading at $85. Also, I could not get any stock data from any of the sites (NYSE, yahoo, google, ameritrade etc) untill past 10:15am EST or so. Is this delay normal for IPOs?


I think they way they set the price is to take the number of shares available, subtract out the number for which there are market orders (i.e. orders to buy at the market price, i.e. non-limit orders), then take the remaining shares and the open limit orders, and find the highest price that gets all the shares sold.

So if it opened at $85, that means there were limit orders placed at that level and higher.

I don't know why there was a delay in the price reporting.


Break out the Adam Smith?

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public"


I don't know very much about the stock market, so forgive my stupid question... but couldn't you circumvent this problem by not selling all the stock at once, but rather sell it in packets of a few percents at a time?

Then you'd get a feel for an appropriate price on the first few trading days, so you can't get scammed except for a few percent of the stock.


Companies do do that. The first sale is called the primary offering, and ones that come after are called secondaries (or follow-on).

I'm not sure if LinkedIn will do that, but it's common among small companies that are capital intensive.

Usually the goal is not to capture the fluctuation in short-term price, but rather the long-term appreciation from demonstration of potential. For example, if Tesla sold everything when it IPOed, it would be unlikely to get a good price for it, not to mention it doesn't need all that cash now so it's somewhat wasteful. But if it sold half then and sold half in early 2012 or so, it will be able to (hopefully) get a better deal in the second chunk.

Back to the issue of short term mispricing, companies like Google hold open Dutch auctions so the actual price is very close to the fair market value. I don't know why LinkedIn didn't do that but I suspect it's because it wants to keep good relations with bankers.

I hope that answered your question.


> I hope that answered your question.

It did, thank you.


If I recall correctly, didn't the IPO of Google use some unconventional structure, like a reverse auction or something? Anyone remember the details?

Anyone know why this isn't done more often?


This is just my theory, but saying LinkedIn was scammed because the IPO was underpriced is like saying Sony or Nintendo were screwed by shortages on the PS2 or Wii. LinkedIn sold a tiny fraction of its shares, far less than the market would bear. The IPO was oversubscribed and artificially doubled in price.

Instead of selling a bunch of shares at the "fair price" up front, LinkedIn created the perception that LinkedIn is undervalued, desired, and worth more than it really is worth. All it had to do was sacrifice a tiny portion of the shares in the IPO and it's the new hot money maker.

Now the company and its investors have created an environment where they can unwind more of its shares at a hefty premium, more than making up for the IPO "loss."

Maybe LinkedIn didn't plan this out so perfectly. But it probably saw this as one possible result of the IPO strategy it chose.


I saw this same story a while back right after the Zipcar IPO. Seriously I expect better from the NYTimes. Especially considering that everywhere else is reporting this as a bubble.

Which is it, did LinkedIn scam investors or have investors scammed LinkedIn?


The story on MSFT's IPO was fraught with uncertainty and concern over who-gets-what in the pricing scheme:

http://features.blogs.fortune.cnn.com/2011/03/13/inside-the-...


Can anyone explain why a company has to dump all their shares at once? It seems like it would make sense to just offer, say 1% of the shares every five minutes at whatever the previously issued shares are trading at. I'm sure there's a good reason, I'm just curious.


These kinds of articles are seriously insulting to the leadership of the companies involved in the IPO. I seriously doubt that the board of LinkedIn would let themselves be scammed by a bank. If the article is true and this scam has been going on for years and LinkedIn allowed it to happen to their company then that would send me a signal not to invest. However, I think they knew the risks and choose a lower IPO to ensure upward price movement on the first day.

There are many ways to IPO (auction, etc) and you have to keep in mind that a big IPO pop makes everyone feel good about the stock. Yes, perhaps LinkedIn possibly could have made an extra $352 million, but if that strategy resulted a $70 IPO with no pop then they would have lost $1 billion in market cap. Pricing and seeing an upward trend have a big impact on the perception of value. Stocks are not priced according to some logical rational algorithm, it's about perception of value and big returns and amazing articles about how it doubled in value on it's first day help fuel those perceptions.


The headline can be summaries as 'no' since his only counter-argument seems to be 'the banks should have known better'

Pricing for a listing is a very complicated process. The underwriters, along with the company executives, go out on a very long roadshow and book orders well before the listing date. It is through these orders, not some magic made up numbers, that the final price is determined from.

In the case of LinkedIn, they changed their list price no less than 4 times between the time they filed their S1 with the SEC and the time they finally listed. Initially it was $31, and the last hike to $45 only happen the night before the listing.

LinkedIn management are professionals who understand their business and understand the process, they have a choice of underwriters to work with and a choice of investors to take orders from. This isn't a single bank taking them for a ride - to suggest that is offensive to those who run LinkedIn

Where the real problem lies, and a problem that was not raised in this criticism, is in how orders are taken. This is what Google attempted to solve with their Dutch Auction system. The claim is that the banking community is so tight-knit that they collude with each other to keep the book price down. So what Google did was to hold a silent auction on bids and allotments, only to find when the process was over that most banks essentially bid around the same mark anyway.

Paying out 6.5% of your company to go public does suck - but it is the cost of creating a viable and flowing public market for your stock. You can't just sell that part of the company to 4 or 5 banks and then ask them politely to pass it on - you may as well just raise another private round in that case. The point of the IPO is to diversity ownership as broadly as possibly and to engage firms that would be willing to take on and trade the stock so that a market is created.

None of the alternate mechanisms work, and you need to be a very large and hot company to even challenge the status quo in the way Google did (and in a way LinkedIn did as well - with their two classes of stock). Note that the underwriters are taking a risk since they end up holding a lot of stock, and in the event of the list price dropping there would be a lot of questions asked about the prospectus and roadshow and potential lawsuits. Also on the other hand, there are not a lot of IPO's that take place, so the underwriters need to make the most of the business they do get - they are the ones with the connections to the large funds that purchase stock, so acting as a risk-bearing agent in that capacity does deserve compensation.

LinkedIn didn't help their cause by listing so few shares. When there is scarcity in the market and so much demand, then there is only one way that the list price would go - and that is up. If they listed twice the number of shares to meet demand then there definitely would not have been so much volatility on the opening day (a lot of which was caused by 'market' orders - which means 'buy at any price').

tl;dr: creating a free flowing and liquid public market for your stock is a very complicated, highly regulated and risky process and nobody has figured out a better way to do it


The claim is that the banking community is so tight-knit that they collude with each other to keep the book price down. So what Google did was to hold a silent auction on bids and allotments, only to find when the process was over that most banks essentially bid around the same mark anyway.

Your tone seems dismissive of the claim, but finding out that a bunch of people all bid about the same amount when they only way they could find out what each other were bidding is collusion doesn't exactly count as evidence against collusion, does it? It's not great evidence for, but at least if bids were all over the place it would be evidence that many banks don't have an informal cartel or whatever.


> Your tone seems dismissive of the claim

I didn't mean it to come across that way, because I totally believe that they do collude. If they didn't then that entire part of the industry would become hyper competitive, unstable and probably a zero-margin (or even loss-leading) business.

These conglomerates in investment banking could handle the business and not make anything on it, they just don't like that. There also is a lot of work involved, so the fees are somewhat justified (see the Microsoft IPO article for an idea of how much work goes into it) - this wasn't helped by Sarbanes Oxley which added a whole new layer of pain-in-the-ass to the process, that only a select few hold the cure for.

There is also an element of this only being a problem when there is a significant first-day rise. You don't hear anybody complaining about it when stocks tank or run level on the first day (if you look at all the tech IPO's from past few years - opentable, rackspace, netflix, renren, etc. most have not done too well in short term).

What would improve the situation would be the companies being able to raise more of the money overseas and thus introducing more competition into the process. Atm overseas funds can buy in after a listing, but for some reason a lot of the pre-listing sales tend to take place in the USA and amongst the usual suspects.


> If they didn't then that entire part of the industry would become hyper competitive, unstable and probably a zero-margin (or even loss-leading) business.

Well, that's what all colluders and monopolists say. I don't see any problem with this outcome. The inefficient get out of the business, and margins settle back to what the market demands.


Why couldn't the shares have been offered in 2 classes: one with voting rights and one without. Offer more of those without. Lots of companies do this e.g. Berkshire Hathaway, Google etc. That would solve the "mispricing" problem.


Many institutional investors won't touch two-class shares. It's an inherently rigged model. But at least you know it's rigged, and the rigging rules are transparent.


It wasn't a scam, just take the fact that "[LinkedIn] became the first major American social media company to go public" and you should notice that it happened due to (1) managing an IPO is HARD (2) web social media is young.


Why can't the new shares sell in a uniform price auction the way treasuries are sold? Per wikipedia (article on auctions):

Debt auctions, in which governments sell debt instruments, such as bonds, to investors. The auction is usually sealed and the uniform price paid by the investors is typically the best non-winning bid.

The underwriting bank would just take bids for a set period of time, and then the winning bidders would pay the highest losing bid. This would help ensure no first-day price spike since any buyer who wanted shares could have bid his top price for them in the auction.


I am going to get slammed for this but I really doubt if they care. 7.84M shares was the IPO makes a total of 94.5M shares outstanding. That's less than 10% outstanding if I am reading the press correctly. The other 90%+ shareholders will want the IPO to pop just so the market impression of the company is positive so they can sell their shares at a good price when their holding period ends. Like any investment, I would look at the current position of the company and it's long term prospects before investing.


The real question is why more companies don't follow Google's lead and use an auction for their IPO. That lets anyone buy if they want to and lets the market decide the price.


Agreed. Maybe it just takes a certain amount of chutzpah to buck the system like that. Or, maybe some of the VCs are in bed with the investment bankers.

It surprises me, though, considering that Google has blazed the trail, that others wouldn't be eager to follow, if only to encourage people to think of them as "the next Google".


I miss the Google/WR Hambrecht style auction priced IPOs. Hopefully, after a couple more companies IPO, the big fish (Facebook, maybe Twitter) will IPO using an auction to allocate and price.


It should also be considered that the underwriters gets paid on the amount raised (7% according to the article), so the underwriters also "lost" money from that perspective.


One thing is clear: Speculation is playing an enormous role in LinkedIn's valuation and capitalization.


Aside from all the investment banker bashing, is the valuation of Facebook and Twitter being more rationally set away from the public by the VCs?


can someone explain why the middle man is needed? Why can't a company apply for a listing on the exchange. Then disclose how many shares they will be selling , then start accepting bids on the exchange?

Obviously you would need regulations around this but why is there a middle man at all?


That market exists, and it's called pink sheets and penny stocks.

This will attract all sorts of scammy pump-and-dump schemes that will convince the public that FOR LIMITED TIME ONLY they have an UNBELIEVABLE OPPORTUNITY to invest at LOW-LOW PRICES.

Like it or not, but investment banks have access to a cadre of accredited retail and institutional investors, so they serve as a filter between legitimate opportunities and outright scams.

Same filter could be achieved, if you got a bunch of emails from accredited investors and just set up a Google group for them.


As usual, the middleman is not really needed. Or they wouldn't be if a new stock exchange was designed to make this process easier. I guess this is essentially what Second Market is trying to circumvent. If the shares of companies can be traded even in small amounts before going public the companies have a better idea what they are worth on the open market.


No! A thousand times no! Second Market's bid/offer spreads are enormous compared to the public stock market. Second Market is a web facade on a straight-forward over-the-counter trading operation.

While the idea of doing a 'soft launch' IPO by building up from a toe-in-the-water market makes some sense, the reason that Second Market is being looked at hard by the SEC is because it's doing something that should be regulated far more than it is (because they're using accredited investor exemptions to get around the various disclosure/oversight rules).


This is a red flag for Facebook.




Applications are open for YC Summer 2019

Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | Legal | Apply to YC | Contact

Search: