Tuesday, 31 May 2011

LinkedIn IPO - Did They Get it Wrong?

On the first day of trading, LinkedIn was valued at $45 a share by its lead bankers, Morgan Stanley, Merrills, BoA and JPM raising some $352m for the company. However, by the end of that first day its stock price had risen 100% netting $millions for the select clients of those lead banks and the day traders who hiked up the price.

One of the Facebook founders, Peter Thiel, basically said this was typical of Wall Street not taking Silicon Valley companies seriously, intimating that the east Coast fuddy-duddies refuse to believe in those 'fly by night' West Coasties and all their new fangled technology, internety things. Why he should complain, I don't know as he was one of LinkedIn's early investors and has already made unbelievable stacks on Facebook and PayPal. I mean, he has become even more filthy rich as a result of this tomfoolery.

He has a point in some ways as the average price hike on day 1 of an IPO is about 15% which seems a fair valuation with a bit of premium for subscribers to the underwriting banks for their share of the risk. In that, context it's a fair accusation that banks got it wrong.

However, given LinkedIn now has an earning multiple of 1,000 it would also be fair to say that those hiking the price are nuts. Surely, at some point there has to be a fall back down to the reality earth?

It seems Web 2.x is well under way and we can feel those bubbles expanding all over again. Veritable Professors are coming out and decrying this 'under valuation' as a crime that should be outlawed when perhaps simple folks in armchairs think, 'Has anyone ever told them that LinkedIn is unlikely to ever be worth 1,000 times its profits ever again?'

Beware, as there are plenty more of the babies on the way - Zynga, Twitter, Groupon and Facebook to name a few. Some would say that the Google method of auctioning stock is the fairest way of doing this as making 100% in a single day is just daft.

I harp on about it but tears will flow sometime. This kind of valuation cannot be sustained.

- Posted using BlogPress from my iPad

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