linkedin ipo

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Fallible
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Post by Fallible » Sat May 21, 2011 12:34 pm

I thought this from Joe Nocera, The New York Times, was interesting, especially the last two graphs:

http://www.nytimes.com/2011/05/21/opinion/21nocera.html

RenoJay
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Post by RenoJay » Sat May 21, 2011 11:04 pm

Welcome to Dotcom Bubble 2.0. Feels a lot like 1998 or maybe even 1999. LinkedIn is great and I use it a lot, but to justify this valuation, their earnings would need to go up something like 100x. It's possible, but too big a risk. When questioned about the valuation the day after the IPO, the CEO said something like, "We'll let the market worry about that and I'll focus on the company." He knows it's overvalued, but cannot say so publicly. I have a hunch we'll see quite a few over priced dotcom stocks in the next year or so, and then eventually most will settle down to high, but "almost explainable" valuations.

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Post by sadie wess » Sun May 22, 2011 9:39 am

Tuxx wrote:Turned on CNBC, the pom poms are out. Having 1999 flashbacks.

Funny guy.
Your comment makes me smile with my morning coffee. I needed that!

sadie wess
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Post by sadie wess » Sun May 22, 2011 10:54 am

fredflinstone wrote:why do I need LinkedIn when all the people I want to talk to are right here on the Bogleheads Investment Forum?
:lol: Agreed!

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spanky123
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Post by spanky123 » Sun May 22, 2011 11:31 am

fredflinstone wrote:why do I need LinkedIn when all the people I want to talk to are right here on the Bogleheads Investment Forum?
For financial matters, this is true.

matt
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Post by matt » Sun May 22, 2011 11:56 am

Fallible wrote:I thought this from Joe Nocera, The New York Times, was interesting, especially the last two graphs:

http://www.nytimes.com/2011/05/21/opinion/21nocera.html
This is pretty silly. Find me anyone who knew that LinkedIn, without a doubt, would go over $100 on the first day. Did Joe Nocera know it? Did you know it? No. Nobody knew this. Investor action is unpredictable. And at $100, have you seen the many articles on how overvalued the stock is? Investment banks have no way of knowing just how stupid investors will be. They try to take advantage of the visible demand, but they don't know for sure what is going to happen. They did, in fact, do their part for LinkedIn by raising the IPO price from the low $30's to $45. So it is clear that they did see substantial demand and raised the IPO price accordingly.

This is just a case of hindsight bias. For example, FriendFinder's (FFN) IPO price on May 11 was $10, but the stock closed at just $5.83 on Friday. Is anyone shouting about how generous the investment banks were to FriendFinder in that case? Of course not. But an error in valuation is an error in valuation. It is an imprecise business to figure out what investors will pay for a new stock.

In hindsight, many of the 1990's dot-com stocks that appeared wildly undervalued at their IPO price (Wall Street thieves!) turned out to be wildly overvalued at their IPO price (Wall Street saviors!).

Ridiculous things happen with IPOs. The blame, however, is on the madness of investors, not investment banks.

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Post by saurabhec » Sun May 22, 2011 11:23 pm

Fallible wrote:I thought this from Joe Nocera, The New York Times, was interesting, especially the last two graphs:

http://www.nytimes.com/2011/05/21/opinion/21nocera.html
Another article taking a swipe at investment banks. How courageous and outside the box thinking! How revolutionary! I must congratulate him for being able to stand alone and speak truth to power.

When investment bank X brings company Y public at $4 billion people gripe about egregious valuations and fleecing the public. If the same company is valued at $8 billion in a free market, then the same investment bank is decried for not gouging every cent they could for the client from the public.

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docneil88
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Initial pricing for IPOs

Post by docneil88 » Sun May 22, 2011 11:39 pm

Bruin wrote:It's only at 106 now, spiked at 122.70. Here's what I don't get. Doesn't this just mean the investment bank that IPO'd the stock did a piss poor job?

I mean if I was the Linkedin CEO, and the company sold 7.84 million shares at $45 each, but the market priced them at $106 each, didn't the company just get screwed out of $478,000,000? That $478,000,000 went to the preferred customers of the investment bank that took Linkedin public.
Excellent point Bruin. I find it surprising that not more companies use an auction system to better determine initial price; I wonder why. Best, Neil

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Post by Valuethinker » Mon May 23, 2011 3:49 am

saurabhec wrote:
Fallible wrote:I thought this from Joe Nocera, The New York Times, was interesting, especially the last two graphs:

http://www.nytimes.com/2011/05/21/opinion/21nocera.html
Another article taking a swipe at investment banks. How courageous and outside the box thinking! How revolutionary! I must congratulate him for being able to stand alone and speak truth to power.

When investment bank X brings company Y public at $4 billion people gripe about egregious valuations and fleecing the public. If the same company is valued at $8 billion in a free market, then the same investment bank is decried for not gouging every cent they could for the client from the public.
There is quite a bit of academic research on the Bulge Bracket 'cartel'. US IPO fees are higher than Europe or Asia (double or more Asia, in fact).

Since, conversely, the US IPO system is a big part of its venture capital funding cycle/system, which is widely identified as a key strength of the US economy, one might wonder whether we have to tolerate a massive inefficiency in one part of the system, to make the rest of the system work.

The stuff Swensen talks about in terms of the performance of VC LLPs (ie that all of the excess return accrues to a handful of funds) suggests something similar.

It's a bit like Amazon, Google, Ebay though (and WalMart). You have a system where there's an identifiable and massive inefficiency which ought to be fixable by radical innovation (e-Auctions etc.). Google tried, and failed, though.

Whenever you see that sort of inefficiency in a system, and wonder why someone has not broken it, you are in the land of economic institutions. Is it simply high transactions costs that create this (remember Ronald Coase!)? Or is it (pace Williamson) some sort of 'Markets and Hierarchies' phenomenon? Is it really inefficient, or is is that uncertainty and/or the costs of obtaining information are very high, and so a market mechanism has evolved to overcome this?

When we look at the US Department of Defence, we know the answer. It's hierarchies. You need to read Thomas Hobbes to understand the role of the DoD (or Henry V ;-)) and its inherent inefficiency. An account of the Battle of Stalingrad would also do it: perhaps the fiercest battle in modern human history.

http://www.rispin.co.uk/henryv.html
And gentlemen in England now a-bed
Shall think themselves accursed they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin's day.
There is the definition of 'hierarchy' if I ever saw one ;-).

Healthcare it's more complex but again you need to appeal to political economy and to path dependence. And that famous Kenneth Arrow paper on healthcare economics

http://www.who.int/bulletin/volumes/82/2/PHCBP.pdf

I suspect that it might be profitable to apply that mode of analysis to the IPO investment banking situation, but I don't know if it has been done, and I don't have the nous to do it.

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Re: Initial pricing for IPOs

Post by Valuethinker » Mon May 23, 2011 3:52 am

docneil88 wrote:
Bruin wrote:It's only at 106 now, spiked at 122.70. Here's what I don't get. Doesn't this just mean the investment bank that IPO'd the stock did a piss poor job?

I mean if I was the Linkedin CEO, and the company sold 7.84 million shares at $45 each, but the market priced them at $106 each, didn't the company just get screwed out of $478,000,000? That $478,000,000 went to the preferred customers of the investment bank that took Linkedin public.
Excellent point Bruin. I find it surprising that not more companies use an auction system to better determine initial price; I wonder why. Best, Neil
Google tried, and failed fairly miserably?

What is interesting is that the cost of an IPO in fees, in the US, is roughly 50% more than in Europe (it very much depends) and twice Asia (my data may be out of date). But is that cartel? Or something else?

Information is expensive. That's a key lesson of modern economics. In fact *the* key lesson of economics.

An IPO is a one-off massive information signal: private to public markets.

So that process of discovering the 'right' valuation for an asset is massively expensive.

Whether it needs to be so, I don't know.

It feels like a system ripe for a low cost, internet based innovator (see Amazon, Ebay, Google etc.).

And yet, such just may not occur.

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Re: Initial pricing for IPOs

Post by docneil88 » Mon May 23, 2011 4:32 am

Valuethinker wrote:Google tried [an auction IPO], and failed fairly miserably?
By what criteria was it considered a failure? The IPO price for Google was for $85/share, and the stock opened at $100. It took four weeks before it increased more than 1/3 beyond its IPO price. So the early pop in Google was far more subdued than the LinkedIn example. Here's data on the first few months of trading of Google: http://finance.yahoo.com/q/hp?s=GOOG&d= ... =66&y=1650

Here's an interesting article about the Google IPO then some excerpts from it:
http://www.forbes.com/2004/05/10/cx_aw_ ... tchup.html :
In a Dutch auction [which is what Google used], a company reveals the maximum amount of shares being sold and sometimes a potential price for those shares. Investors then state the number of shares they want and at what price. Once a minimum clearing price is determined, investors who bid at least that price are awarded shares. If there are more bids than shares available, allotment is on a pro-rata basis--awarding a percent of actual shares available based on the percent bid for--or a maximum basis, which fills the maximum amount of smaller bids by setting an allocation for the largest bids. ...[Patrick] Byrne [of Overstock.com] says the current row of investment bankers is "like a cartel trying to make sure all members stand shoulder to shoulder. We always knew it would take someone like Google to break it." Goldman Sachs, often looked to as the top underwriter for quality offerings, is believed to have refused association with Google's offering.
BTW, thanks Fallible for the link to that interesting NYT article on the LinkedIn IPO ( http://www.nytimes.com/2011/05/21/opinion/21nocera.html ).

Valuethinker
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Re: Initial pricing for IPOs

Post by Valuethinker » Mon May 23, 2011 6:22 am

docneil88 wrote:
Valuethinker wrote:Google tried [an auction IPO], and failed fairly miserably?
By what criteria was it considered a failure? The IPO price for Google was for $85/share, and the stock opened at $100. It took four weeks before it increased more than 1/3 beyond its IPO price. So the early pop in Google was far more subdued than the LinkedIn example. Here's data on the first few months of trading of Google: http://finance.yahoo.com/q/hp?s=GOOG&d= ... =66&y=1650

Here's an interesting article about the Google IPO then some excerpts from it:
http://www.forbes.com/2004/05/10/cx_aw_ ... tchup.html :
In a Dutch auction [which is what Google used], a company reveals the maximum amount of shares being sold and sometimes a potential price for those shares. Investors then state the number of shares they want and at what price. Once a minimum clearing price is determined, investors who bid at least that price are awarded shares. If there are more bids than shares available, allotment is on a pro-rata basis--awarding a percent of actual shares available based on the percent bid for--or a maximum basis, which fills the maximum amount of smaller bids by setting an allocation for the largest bids. ...[Patrick] Byrne [of Overstock.com] says the current row of investment bankers is "like a cartel trying to make sure all members stand shoulder to shoulder. We always knew it would take someone like Google to break it." Goldman Sachs, often looked to as the top underwriter for quality offerings, is believed to have refused association with Google's offering.
BTW, thanks Fallible for the link to that interesting NYT article on the LinkedIn IPO ( http://www.nytimes.com/2011/05/21/opinion/21nocera.html ).
Interesting. I remember that it really seemed to undervalue Google, and then it lagged.

I'll need to think about this.

Thank you for the analysis/ data.

matt
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Re: Initial pricing for IPOs

Post by matt » Mon May 23, 2011 7:46 am

docneil88 wrote:By what criteria was it considered a failure? The IPO price for Google was for $85/share, and the stock opened at $100. It took four weeks before it increased more than 1/3 beyond its IPO price.
Google's offering price of $85 came in well below expectations because the demand seemed insufficient. Within two months of the IPO, it was trading at $200 and another year after that it was $400. Since the stock is over $500 today, it's clear that those weren't just pie-in-the-sky valuations like the dot coms (and we shall see about LinkedIn). So I don't know how you can claim that $85 was a good price for Google when it is clear, in hindsight, that it was worth much more to investors. Why and how it came to be that way is an extremely challenging question, but it clearly had nothing to do with investment banks.

And this is just hindsight. If anyone here knew that LinkedIn stock was going to trade to $120, you could have bought under $90 at the open and sold for a 30% gain a few hours later. But you didn't do that, because you know that the market price is uncertain. Guess what? It's uncertain for everyone, including investment banks and IPO company management.

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docneil88
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Re: Initial pricing for IPOs

Post by docneil88 » Mon May 23, 2011 3:43 pm

matt wrote:
docneil88 wrote:By what criteria was it considered a failure? The IPO price for Google was for $85/share, and the stock opened at $100. It took four weeks before it increased more than 1/3 beyond its IPO price.
Google's offering price of $85 came in well below expectations because the demand seemed insufficient. Within two months of the IPO, it was trading at $200 and another year after that it was $400. Since the stock is over $500 today, it's clear that those weren't just pie-in-the-sky valuations like the dot coms (and we shall see about LinkedIn). So I don't know how you can claim that $85 was a good price for Google when it is clear, in hindsight, that it was worth much more to investors. Why and how it came to be that way is an extremely challenging question, but it clearly had nothing to do with investment banks.

And this is just hindsight. If anyone here knew that LinkedIn stock was going to trade to $120, you could have bought under $90 at the open and sold for a 30% gain a few hours later. But you didn't do that, because you know that the market price is uncertain. Guess what? It's uncertain for everyone, including investment banks and IPO company management.
With an auction system the percentage difference between the IPO price and the opening price should be and is expected to be significantly less on average across many IPOs, as well as significantly less uncertain for any particular IPO. Material changes in a company or the investing public's view of a company months or years after the IPO seem less relevant to that. Though, I guess the case could be made that under the dominant system of IPOs, the investment banks are willing to make much more of an effort to drum up initial demand and and thereby increase the IPO price. That has to be weighed against the investment banks' tendency to encourage a lower IPO price in order to reward good customers and to make some money on the overallotments and any other shares of the IPO that the investment bank acquires at the IPO price.

IMO, the key question is, do you think Google would have gotten a higher IPO price if they'd used the traditional IPO system with the same IPO date and the same number of shares offered? Honestly, I don't know. And the doubling of stock price within two months is some evidence that the answer might be "Yes." Still, the Google IPO already had a lot of positive exposure prior to the IPO, and I'd be surprised if the dominant IPO system would have added much more to that. For companies with less positive-exposure or less-positive exposure, the attraction of the dominant IPO system increases. Best, Neil
Last edited by docneil88 on Mon May 23, 2011 4:27 pm, edited 1 time in total.

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Random Musings
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Post by Random Musings » Mon May 23, 2011 3:55 pm

Tuxx wrote:
Turned on CNBC, the pom poms are out. Having 1999 flashbacks.


I believe CNBC actual wore party hats when the Naz hit 5,000.

RM

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stratton
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Post by stratton » Mon May 23, 2011 4:14 pm

The Saturday May 21, 2011 Financial Times Lex Column played around with the LinkedIn IPO and The Rapture...
Growth assumptions also must be adjusted, not to mention interest rates at which cash flows are discounted (as the risk-free rate approaches infinity). Further, doomsdays really put the "terminal" in terminal values. In discounted cash flow analysis, much value resides in the forecast of these flows into perpetuity. As a rule, investors should be cautious when a high proportion of a campany's worht is from cash made a long way in the future.

Consider the value of LinkedIn, if the planet is annihilated in five months. The current share price requires the social networking company to have a double-digit growth rate beyond 2018 and into eternity. Assume no growth from October, however, and LinkedIn is worth $1bn. Those investors who on Thursday value the company at up to $11.6bn in its stock market debut are presumably sceptical of Mr. Camping's prediction.
:P

Paul
...and then Buffy staked Edward. The end.

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