My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Thursday, June 16, 2011

LinkedIn IPO- The linked get in

When LinkedIn went public on May 19th, its shares soared to $94.25 from the Initial Public Offering (“IPO”) price of $45. It has been reported the initial IPO target price was to be $32 to $35 per share, but huge demand moved the IPO price to $45. Personally, I have concerns in regard to LinkedIn’s valuation, however, that is not the topic of this blog.

On May 20th, many newspapers carried the following unattributed quote “I got 500 shares and was told to consider myself lucky,” said one hedge fund manager, who flipped his holdings in the low-80s. “There are billion-dollar institutions that are not getting any stock.”

I chuckled to myself when I read that quote, as we mere mortal retail investors are never afforded access to these IPO’s. We pay the inflated IPO price after the huge profits have been made by the investment bankers' top customers; mutual funds, pension funds, hedge funds, friends and family and other major money managers who have access to these IPO’s before they trade publicly. So, I did not shed very many tears for the poor hedge fund manager who only had 500 shares to sell for a one day profit of $20,000; although his buddies probably made $200,000 to $1,0000,000 that day, so maybe he does deserve some sympathy for his large allocation envy.

The LinkedIn IPO was typical of any hot IPO; the shares stayed within the inner investment banking circle. The rich get richer. As a capitalist at heart, I am torn between allowing the market system to work and the distaste of what I consider a "capitalistic aristocracy". Yes, I understand the risk investment bankers take and the need to reward its best customers for buying other IPO's and other products, but the bankers and their customers make absurd amounts of money on these type IPO’s.

I guess what bothers me the most is that retail investors are typically only given access to IPO’s when the demand is insufficient from the investment banker’s best customers or the IPO is considered fairly priced, so there is no easy money to be made. Sort of a don’t call us when we have a great IPO, but we will call you when we have otherwise. The above discussion does not even account for the regulations in place for accredited investors that exclude the typical retail investor, for their “own protection" in certain circumstances.

The IPO process has an inherent systemic bias that I accept, but that does not mean I have to like it.

[Bloggers note: I know my loyal reader and commentator Skuj will follow with a capitalistic diatribe on this blog; so Skuj, in my opinion you can be a capitalist and still think the system is slanted unfairly at times].

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  1. I never express an interest in IPOs for the simple reason that if it's a "hot" IPO, I won't be allotted any shares. If it's a stinker (think Vonage) I won't be able to flip it. So, it's better for us small fries to ignore the IPO market altogether.

  2. Hey CC, I agree. We peasants are never allocated anything of value in IPO’s. However, with Private Placements of small cap stocks I have followed and know extremely well, I will occasionally buy into the PP to get the warrants. I will then trade the shares I have on hand and when the trading restriction on the PP shares is removed, trade the PP shares. I then play for free with the warrants. However, there is always the risk of the shares dropping during the typical 4 month hold restriction.

  3. Definitely doesn't seem fair.

    The other thing I wonder about these IPOs is why the initial share price wasn't set higher. Perhaps it's not all that predictable what will happen with an IPO, but if I were one of the Linked-in owners, I'd be a bit annoyed considering it looks like the offering was under-priced.

  4. Mike, interesting point. But you have to remember, most founders paid $1 for their shares and must hold a certain percentage of restricted shares on the IPO, so they win win. They get proceeds on their fouders shares that are all profit and if the IPO takes off, they have their restricted shares that benefit. Yes,I think setting an IPO price on a LinkedIn IPO is unpredictable, but most are not so unpredictable and remember, the initial purchasers mutual funds, hedge funds etc, would not ever pay the inflated prices that the market does the next day in most cases.

  5. Interesting that your critique is that the bankers made too much money with their exclusive access - isn't the real problem that LinkedIn had no concept of their own valuation, and sold their company for $0.30 on the dollar? If not for this fact, there'd be no easy money, and presumably no rant to follow.

    That the institutions worked for their own profit is no surprise, and I have no issue with it - when the market throws a thousand pitches each day I don't need to swing at every single one. I'll be the one picking up profits when the institutions get scared and sell assets at silly prices down the road.

  6. LinkedIn insiders probably had a true valuation, an irrational market did not. Considering the sp is now $65 and dropping, it is looking like the LinkedIn founders may not have lost out as much as it initially seemed.