Comments on: The LinkedIn IPO debate A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: bxg21 Tue, 24 May 2011 01:00:47 +0000 Felix,
You have such repeated, insistent, conviction that “price discovery” is the justification for many things financial but it always seems as though you treat this as something obvious and in no need of any explication. One day, please, could you spend a bit of time telling us what you are really thinking when you invoke this concept?
E.g. Do you think there is an objectively “correct” (or economically useful/efficient) price being “discovered” somehow? (If so, how do you reconcile this with e.g. such high volatility in the public markets as we have seen over the last two years, or the periodic huge disconnect between private and public valuations?) Or do you just mean “a price near where there is substantial two-sided liquidity”? (In which case, don’t you think you over-praise its significance … I’m thinking in particular of various of your CDO posts).
In this post you say: “But the bankers … also want to achieve one of the main purposes of going public in the first place, which is price discovery?”
Do they really consciously _want_ this? I perhaps see it if it means merely “create a liquid market”, but wanting something beyond this? (Cynically: if their bonus isn’t tied to something, can a banker really _want_ something?)
And about a hypothetical insider already owning some of the company you say “The main interest that I have in an IPO like this is as a price-discovery mechanism…”. Surely no! My main interest is the IPO creating a liquid venue where I can sell my stake at a high-price when I want to. The higher the better. I’d be pretty sad if the market “discovered” a $1 price per share, and being told what a surprising discovery this was would not mollify me. Again, unless you mean something extremely shallow
by the term “price discovery”.

By: netvet Mon, 23 May 2011 22:02:47 +0000 Everyone should have expected a great run up given the popular demand for a relative scarcity of shares. This was a small issue, and that is where I believe both the bankers and the company made a big mistake. More shares would have provided a more efficient market and a greater war chest for acquisitions. For a company with this small of a float, it is much better to use cash than stock for an acquisition.


Using stock for acquisitions is a double edged sword. Such shares used to acquire a target are usually sold by the shareholders of the target. With such a small float as LNKD, an acquisition would put inordinate downward pressure on stock. Goldman proved to be wise in the longer run. Had they stayed in and been locked up, there is a reasonable chance they would not realize $45 after the lockup ended. We’ll see. So far, the “efficient” market is moving the stock well below it opening day close, and it still has a P/E of 1300.

By: basebalman Mon, 23 May 2011 20:56:47 +0000 Mr. Salmon,

While I agree with you that the argument that LNKD was “scammed” is a bit silly, I don’t think the Goldman aspect proves very much. Wouldn’t Goldman have signed a lock-up like all other shareholders if they hadn’t sold their whole stake? Assuming that’s so, their total sale says nothing about whether or not they expected there to be a massive pop, only about whether they expected any such pop to be sustained over the next six months. Similarly, a six-month lock-up of a tech stock with little revenue and prospects in the middle of what many think is a second tech bubble may be 6 months more risk than GS wanted to take.

By: klhoughton Mon, 23 May 2011 17:09:52 +0000 The bankers are accountable. The other Social Media firms, having seen the results of the LinkedIn IPO, will choose their relationships for going public in part on that effort.

My bet is they’ll be very happy to work with the same people.

“The only real losers are the investors in Goldman Sachs’s fund — I suspect they’re rightly very angry about the company’s decision to divest itself of its entire stake at $45 per share.”

Talk to me in two or three years, Felix, when buying LinkedIn isn’t the only way to “invest in social media” and GS’s use of that money to seed The Next Big Tech has Blodgett blathering about how he would put a price target of $400/share on it.

By: NiamhMorrigan Mon, 23 May 2011 16:58:02 +0000 There are process strictures that affect the pricing decision. TED how come you miss these?

If you want to price more than $2 above the high end of the range, you have to file an amended S-1 and reconfirm all orders. Even if you wanted to sell the deal to fickle momentum traders instead of, nominally, long-term investors, the deal on the table for was not $100 or $45, it was $45 today, or maybe $100 tomorrow if nothing happens overnight and the buyers don’t get cold feet.

By: jmh530 Mon, 23 May 2011 16:15:15 +0000 One part of your post seems mistaken. If Goldman put their entire stake up at the open, then they couldn’t have sold it at $45. They would have sold it at the open price (which is done by matching buyers and sellers).

After all, how could they sell it at the IPO price (except to their clients, not on a market) if it never traded there?

I was under the impression that IBs normally have their contracts worded so they can’t sell shares they receive for the IPO until a certain amount of time has passed. Is this incorrect?

By: freecy Mon, 23 May 2011 14:38:00 +0000 “As a result, almost none of the ‘losers,’ here, bar LinkedIn’s corporate treasurer, really cares about that money.” Yes, but raising money for the company is the whole point of most IPOs. Fundamental businesses (especially those more capital-intensive than a resume-hosting website) rely upon that capital. Drawing any broader conclusions based on the situation of a company “trying to manage a cash pile which was already very large and is now significantly larger” (cue the violins!) is silly… Marketing buzz and investor profits are side-effects of a successful IPO (and successful post-IPO business!), not the chief purpose.

By: KidDynamite Mon, 23 May 2011 13:16:46 +0000 I can’t stand the “Auctions don’t work” nonsense. I”m trying to read that linked research paper, and it seems to miss a blatantly obvious point: our public equity market is an auction.

so, with LNKD, we had a book-building IPO (Which was mispriced, undeniably – but probably not for the reasons Nocera alleges) – and THEN an auction to determine the price of the shares. We can remove the book-building step and just have the auction to determine the price of the shares. It’s hard, philosophically, for any trader to argue that this would be “Wrong” “unfair” or “inequitable.”

By: KenG_CA Mon, 23 May 2011 13:07:05 +0000 I can’t believe I’m agreeing with Blodgett, but he’s right: the bankers should be held accountable. Even if they didn’t scam LinkedIn, and just didn’t know what they were doing, they charged a lot of money for their alleged expertise, and should give the entire fee back to LinkedIn.

Of course, maybe our expectations for bankers is just too high. Even though they manage to take a disproportionate share of the nations’ profits, it’s not because they’re smart. They have just learned how to game the system, and their unspoken collusion allows them to get away with their gross miscalculations, because there is no real competition. Did they intentionally screw LinkedIn to make money for their brokerage clients? I don’t think they care about either side, as their #1 priority is themselves.

By: KidDynamite Mon, 23 May 2011 12:39:40 +0000 Sorkin weighs in today, Felix: hy-linkedins-price-was-appropriate/