A debate is raging online about whether or not the LinkedIn initial public offering should have been priced higher by investment banks last week. They offered the shares at $45, but the stock quickly soared to prices exceeding $100 per share. Currently, they've began calming down a bit, selling for around $85 per share as of 10:30 this morning. Still, that's quite a bit higher than their $45 per share initial price. How do we determine whether the banks should have priced it higher?
Last week, I posted a quick take on the argument for why the IPO should have been priced higher, based on a piece by Henry Blodget from Business Insider. The general idea is that LinkedIn would have obtained more proceeds if the stock was priced higher. Instead, the handful of large institutional investors that the banks handpicked to get those shares benefited. These are likely some of these banks' best clients, which is why they got priority. The difference is somewhat significant. If the offering was priced at $70 per share (still low), then the company and existing shareholders would have made an additional $196 million. Instead, investors got that pure profit.
There are (at least) three questions that need to be answered here.
Should banks have priced the LinkedIn IPO higher?
The way to answer this question is really quite simple: what do the interested parties think? First, the investors who purchased the IPO obviously aren't complaining. They made millions of dollars in a couple of hours by sitting at their Bloomberg terminals and watching the demand for LinkedIn's stock grow.
The other interested party, of course, is LinkedIn. Was the company okay with the fact that, by pricing the IPO so low, it left a few hundred million dollars on the table? The best way to figure this out would be to just ask the company. In fact, that's what Bloomberg Television did last week. LinkedIn CEO Jeff Weiner said the company was "very comfortable" with the $45 per share offering price.* He stressed that they spent a lot of time talking with long-term investors and they believe the price was fair. He said he wouldn't read too much into one day's worth of trading.
If all parties are happy here, it's hard to really complain about how the banks priced the IPO.
Should LinkedIn be angry?
It's one thing for the "official word" from LinkedIn to be positive. But maybe the firm isn't thinking straight, still on a high from it's stock's success. From a financial standpoint, should LinkedIn be angry? That couple hundred million dollars seems like a lot of money. In this case, however, it realty isn't.
Last week's offering provided about 7.8 million shares to the public. Of that 4.8 million was sold by the firm and 3.0 million were sold by existing shareholders. Another 86.7 million remained unissued, held by existing shareholders. Put another way, the company itself only sold 5.1% of its shares. Another 3.2% of shares were sold by existing shareholders as a part of the IPO (at $45 per share). The other 91.7% of the firm remained held by existing shareholders.