Did Bankers Scam LinkedIn Out of Over $130 Million?

Analysts claim social network was ripped off by underpriced IPO deal

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When social network LinkedIn's stock skyrocketed after its IPO debut, the financial community reeled at the fact that LinkedIn's underwriters, Bank of America Merrill Lynch and Morgan Stanley, had set the price so low. As Henry Blodget at Business Insider indicated, they set the price at $45 a share when they could have asked for $90, and thus effectively cheated LinkedIn out of over $130 million.

Joe Nocera furthers this claim against LinkedIn's underwriters at The New York Times, noting that while there is "nothing wrong with a small 'pop' in the aftermath of an IPO," such a tremendous rise in stock price indicates that "in reality, LinkedIn was scammed by its bankers."

The fact that the stock more than doubled on its first day of trading — something the investment bankers, with their fingers on the pulse of the market, absolutely must have known would happen — means that hundreds of millions of additional dollars that should have gone to LinkedIn wound up in the hands of investors that Morgan Stanley and Merrill Lynch wanted to do favors for. Most of those investors, I guarantee, sold the stock during the morning run-up. It’s the easiest money you can make on Wall Street.

Blodget favored Nocera's analysis, tweeting, "Glad folks starting to see that big IPO 'pop' like LNKD is bad, not good ... [deal mispriced, company ripped off]"

Nonetheless, not everyone agrees that the evidence of a financial scam is so cut and dry based solely on the "pop" in price. The blog The Epicurean Dealmaker presented a "hotly-anticipated" (according to financial blogger Felix Salmon) take down of Nocera and Blodget.

Investment bank IPO pricing is the epitome of (very) highly educated guessing ... The picture gets complicated, however, when the company in question, like LinkedIn, does not have any comparable peers among listed public companies... But once we go to market, the issuer and the investment banks essentially hand the steering wheel over to investors.

And sometimes, as in the case at hand, you get what we call in the trade a "hot IPO... I'll let you in on a little secret: Morgan Stanley and Bank of America Merrill Lynch think people who bought LinkedIn shares at $90 or more are nuts...

The blog's further points out that, whether or not a hot IPO might cause 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."

But Nocera himself noted that LinkedIn executives are probably thrilled about the IPO at present. Nonetheless, he maintained that that is no excuse for the underpricing, nor is it indication that the company will not suffer for it in the future. "It’s worth remembering that most of the young Internet companies with those eye-popping I.P.O.’s back in the day are long gone," he writes. "With their flawed business models, maybe they were doomed from the start — but the cash they left on the table at the IPO might have allowed at least a few of them to survive."

This article is from the archive of our partner The Wire.