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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.




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