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.
And those existing shareholders should be ecstatic. Even now, at $85 per share, they are holding $7.4 billion in stock.
The point here is that the vast, vast majority of LinkedIn's stock was unaffected by the IPO price. All those other shares were likely mostly held by the firm's initial investors or other insiders. They now benefit from the upside, and there's a lot of it. Now those additional shares could be issued at that higher price to provide a great deal of capital if the company needs it. Really, that $196 million lost is comparably a drop in the bucket. So there might be a little reason for LinkedIn to be angry, but a big of reason for the company to be pleased.
Should the way that IPOs work be changed?
This is more of a philosophical question. On some level, those IPO investors that happen to be important clients to investment banks often get a pretty good deal. Banks commonly underprice IPOs, because it looks really bad when some shares for an IPO aren't sold. Is this sort of favoritism fair?