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What are your thoughts on LinkedIn's IPO pricing?
Morgan Stanley and Bank of America sold LinkedIn to their institutional clients for about $45 per share. The stock closed at over $90 that same day which meant the company left about $175M on the table. What dynamics create this type of IPO pricing? Is it actually a problem and is so should the bankers take the blame? LinkedIn? Retail investors using market orders?
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2 Answers
It is hard to say whether LinkedIN was well served by its investment bankers or not. A number of years ago, I personally was involved in an IPO in which the investment bankers priced the stock at $8.00 in a difficult market. It was a number of months before the stock traded above $8.00 however it never fell below this figure as the investment firms made a market in the shares and seemingly were keeping the price stable. Eventually the shares rallied. So there was no big profit from the IPO and patience was required to make profits for the initial investors. So what happens after the IPO is not entirely predictable.
The trading following the initial sale is all stock that was flipped by the institutional investors that bought in the IPO. The first day trading seems to have disadvantaged LinkedIN, but it is my belief that the stock will settle further as time passes and the euphoria of the IPO fades. Fearing losses, people that purchased at the high first day prices will panic and sell further depressing the price. So it would not surprise me to see the shares trading in the $50 to $60 range shortly, and that would be a good outcome.
It is hard for me to understand why a retail investor would join the rush into a stock like this and create the froth that the market experienced. If they studied history, they would know that most stocks need a while to find their price level and to get in too soon can be extremely risky.
As Rick says, IPOs are unpredictable and personally I don't believe the bankers need to apologize (although that debate continues to rage on various forums across the web).
The large 'pop' appears to have been primarily a result of retail investors with market orders (foolish) and short-term traders trying to ride the massive momentum (risky). It's hard to imagine there are many long-term investors holding shares because they believe the company is worth what it is currently trading at - so it's very likely the shares will trade down - eventually.
Either way, clearly this IPO shows tremendous market enthusiasm for 'social' companies and bodes well for more companies to follow.
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