I was trying REALLY hard to avoid getting involved here, but I’ve seen far too much naive speculation and finger-pointing that Linkedin’s bankers massively underpriced the issue and that they should have done an auction (“just like Google did in 2004!”).
If you haven’t already, read The Epicurean Dealmaker’s spot-on post about how IPO bookrunning and underwriting works for a firm like Linkedin.
Let me make this perfectly clear: Investment banks do not set the ultimate price for IPOs; the market does.
And sometimes, as in the case at hand, you get what we call in the trade a “hot IPO.” Investors work themselves into a buying frenzy, the offering becomes massively oversubscribed (e.g., orders for 10 or more shares for every one being offered), and the valuation gets out of control. Underwriters have a limited ability to respond to these conditions, which typically emerge during the pre-IPO marketing or “bookbuilding” process, including revising estimated pricing up, like LinkedIn’s banks did (+30%), and increasing the number of shares offered. But eventually you just have to release the issue into the marketplace and let the market decide what the company is really worth…
So say what you will about hot IPOs causing bubbles, no-one directly involved in the LinkedIn offering—the company, the selling shareholders, the underwriters, or the initial investors—is remotely unhappy with what happened. I guarantee you the clients were guiding the process and making decisions every step of the way. The underwriters simply told them what was possible, took the company to market, and got out of the way.
So people like Joe Nocera and Henry Blodget – both of whom should know better, or at least have the phone number/email of those who do – can whine and rationalize all they want that bankers INTENTIONALLY screwed the company out of money to cater to their institutional clients, but there’s little if any evidence that is the case. Bankers, as TED explains better than I, get paid depending on the size of the issue, which is the # of shares times the price. Therefore it was in their own best interest to maximize both of those things. Do you think a single banker would knowingly leave money on the table like that???? Get the fuck out!
If you’ve read TED’s take and still think the bankers underpriced the issue, read this, from Lise Buyer, a banker who worked on Google’s (auction) IPO, emphasis mine:
There is no way ever to know what’s going to happen on day one and particularly yesterday, when there had been so much activity in the private markets. Clearly when they raised the estimated range and then when they priced LinkedIn at the top of the range, that was a pretty good signal that they thought there would be significant after-market demand. But it’s impossible to predict what the retail investor will do. People who are chastising the banks for having dramatically underpriced it aren’t really being fair. You can’t predict what will happen…
I think on the institutions side, the enthusiasm tells us that professional investors are looking for high-growth profitable companies with compelling stories to tell. On the individual investor side, it tells us we haven’t learned anything. Everybody wants to own a piece of something they know about. Consumer brands almost always have an advantage when they go public. It also tells us that individuals are feeling favorable about the stock market again.
If you STILL think the bankers screwed up, and/or think the offering would have been more “fair” (which is not in any way, shape or form the purpose of such things) had the company & its underwriters conducted an auction (“Just like Google in 2004!”), read this paper, Why Have IPO Auctions Failed The Market Test (pdf). Issuers – that would be the firms looking to sell shares – prefer bookrunning to auctions, in essentially every country in the world with developed capital markets, even ones like the U.S. where auctions have been used effectively. The reasons for this are myriad and are spelled-out in far greater detail in the paper linked-to above, as well in others slightly less rigorous literature.
Curiously, the only people complaining about the Linkedin IPO are journalists and bloggers. I’ve yet to hear anything from the firm’s executives or retail stockholders. Maybe, just maybe, that’s because this is a non-story. As much as really, really I loathe the term, it is what it is. Hell, the Securities & Exchange Commission has several pages on its website for investors who want to learn how IPO allocation – even “Hot IPOs” like Linkedin – work. Guess what? The SEC knows firms generally impose restrictions on which clients they’ll allocate IPO (the broader industry term is “syndicate”) shares to, whether by minimum account balance, fees/commissions generated, or whatever. Again, this is not new information.
Don’t hate the player, don’t hate the game; hate ignorant journalists who chase and advance factually incorrect non-stories to further their own careers.