LinkedIn IPO recalls credit as much as dotcom boom
By Rob Cox and Lisa Lee
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
It’s easy to make the parallel between today’s Internet stock frenzy and the bubble that popped a decade ago. But the comparison to the far more damaging credit boom may be more appropriate. As they did amid dotcom mania, investors are taking big risks without clear rewards. But they’re also signing away more of their rights this time, as bondholders perilously did.
Today’s illustration comes courtesy of LinkedIn, the social network with a big following among the out-of-a-job, or looking-for-one, crowd. The company supersized the price of its initial public offering on Wednesday by 30 percent, giving the firm a potential value of as much as $4.3 billion.
To put it in perspective, at the top of the range, LinkedIn would fetch a valuation of 15 times trailing 12-month sales — and about 82 times EBITDA. Even assuming its growth trajectory continues over the next year, the IPO would value LinkedIn at nine times future sales and nearly 70 times estimated EBITDA.
If Chief Executive Jeff Weiner can keep LinkedIn expanding at a similar pace for a few years, the company might grow into the value investors seem willing to accord it now. But that doesn’t offer much upside — and takes little account of LinkedIn’s risks, which are amply laid out in its prospectus.
Of course, investor exuberance is a hallmark of any financial bubble, including the dotcom boom that came to a grinding halt in 2000. But LinkedIn’s debut carries an extra frisson of danger that recalls the credit bubble that burst in 2008.
Back then, bondholders, in their headlong drive for yield, surrendered many of their covenants, the rules that determine what borrowers must or must not do to satisfy terms set by lenders. LinkedIn is asking investors to abdicate similar rights. The shares the company is selling carry a sliver of the voting power of Class B shares that LinkedIn founders, managers and staff own. This group will hold approximately 99.1 percent of the voting power after the IPO.
During booms, investors make wagers on their beliefs about growth and future earnings. But history suggests that in bubbles they give up too much today for the promise of tomorrow.