There is only one thing that stands in the way of a successful pricing later today of LinkedIn’s IPO – and that’s common sense.
But tonight’s IPO buyers need not worry. Common sense generally has little to do with the IPO market – and absolutely nothing to do with the LinkedIn IPO.
After all, what is the sense in putting a $4.3 billion valuation on a company with slowing revenue growth and zero projected profits for 2011 or in paying $43.50 for a share that post-IPO will have a tangible book value of just of $3.38, or one-thirteenth what you just paid.
Of course, there isn’t much sense. But that doesn’t matter. Here’s what does: The belief that someone out there will pay even more for the shares.
When everyone on Wall Street tells you that a LinkedIn share will open far higher than the price at which it is issued, the 189-page LinkedIn S-1 and your 500-line Excel DCF model are really just details.
Why not put in for an allocation of shares and then flip them at your earliest convenience?
Such is the beauty and horror of a frothy IPO market where it’s in everyone’s interest to ignore ugly facts and numbers and put a pretty price on LinkedIn.
Consider the selling shareholders. Goldman Sachs, just to name one, will be selling its entire stake of 871,840 LinkedIn shares in the IPO. Why would Goldman — or any other selling shareholder, for that matter — unload their shares for anything less than the most they could get?
Even those investors not selling like Sequoia and Greylock have a vested interest in a successful IPO. LinkedIn’s pre-IPO shareholders are carrying shares at an average cost of $1.34 a share. Why would it be bad for them if the shares close the first day at $50?
Then there’s LinkedIn CEO Jeff Weiner. Sure, he doesn’t want the headache of a poor IPO aftermarket. But he’s taking $5 million off the top by selling down 115,335 of his 2.3 million shares.
As for Morgan Stanley, LinkedIn’s lead underwriter, it badly needs this IPO to be deemed a “success.” On the board of LinkedIn sits Reid Hoffman, Skip Battle and Mike Moritz, David Sze – a who’s who of Silicon Valley. If LinkedIn is up 50% a week after the IPO, Morgan Stanley can kiss the Facebook and Zynga IPOs goodbye.
That’s why the underwriters just upped the LinkedIn price range by a whopping 30% or $10 a share. It’s not that Morgan Stanley thinks the company is suddenly “worth” 30% more. It’s just that Morgan Stanley discovered on the LinkedIn roadshow that they could unload LinkedIn’s shares at almost any price.
That’s the dynamic of the “hot” IPO. And strangely, jacking the price by 30% made the offering even more enticing for lots of prospective IPO buyers.
That this shouldn’t be the case. The laws of supply and demand say the higher the price, the less the demand.
But again, that’s common sense and this is Wall Street, where a higher price equals more demand, where if the other guy wants something, then you want it even more.
How did Microsoft get comfortable paying $8.5 billion for Skype? Why are private investors paying $70 billion for Facebook shares?
Because they convinced themselves that if they didn’t, somebody else would. It’s impeccable logic until you realize it doesn’t make any sense.
But tonight’s IPO buyers need not worry. Common sense generally has little to do with the IPO market – and absolutely nothing to do with the LinkedIn IPO.
After all, what is the sense in putting a $4.3 billion valuation on a company with slowing revenue growth and zero projected profits for 2011 or in paying $43.50 for a share that post-IPO will have a tangible book value of just of $3.38, or one-thirteenth what you just paid.
Of course, there isn’t much sense. But that doesn’t matter. Here’s what does: The belief that someone out there will pay even more for the shares.
When everyone on Wall Street tells you that a LinkedIn share will open far higher than the price at which it is issued, the 189-page LinkedIn S-1 and your 500-line Excel DCF model are really just details.
Why not put in for an allocation of shares and then flip them at your earliest convenience?
Such is the beauty and horror of a frothy IPO market where it’s in everyone’s interest to ignore ugly facts and numbers and put a pretty price on LinkedIn.
Consider the selling shareholders. Goldman Sachs, just to name one, will be selling its entire stake of 871,840 LinkedIn shares in the IPO. Why would Goldman — or any other selling shareholder, for that matter — unload their shares for anything less than the most they could get?
Even those investors not selling like Sequoia and Greylock have a vested interest in a successful IPO. LinkedIn’s pre-IPO shareholders are carrying shares at an average cost of $1.34 a share. Why would it be bad for them if the shares close the first day at $50?
Then there’s LinkedIn CEO Jeff Weiner. Sure, he doesn’t want the headache of a poor IPO aftermarket. But he’s taking $5 million off the top by selling down 115,335 of his 2.3 million shares.
As for Morgan Stanley, LinkedIn’s lead underwriter, it badly needs this IPO to be deemed a “success.” On the board of LinkedIn sits Reid Hoffman, Skip Battle and Mike Moritz, David Sze – a who’s who of Silicon Valley. If LinkedIn is up 50% a week after the IPO, Morgan Stanley can kiss the Facebook and Zynga IPOs goodbye.
That’s why the underwriters just upped the LinkedIn price range by a whopping 30% or $10 a share. It’s not that Morgan Stanley thinks the company is suddenly “worth” 30% more. It’s just that Morgan Stanley discovered on the LinkedIn roadshow that they could unload LinkedIn’s shares at almost any price.
That’s the dynamic of the “hot” IPO. And strangely, jacking the price by 30% made the offering even more enticing for lots of prospective IPO buyers.
But again, that’s common sense and this is Wall Street, where a higher price equals more demand, where if the other guy wants something, then you want it even more.
How did Microsoft get comfortable paying $8.5 billion for Skype? Why are private investors paying $70 billion for Facebook shares?
Because they convinced themselves that if they didn’t, somebody else would. It’s impeccable logic until you realize it doesn’t make any sense.
