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LinkedIn IPO scam by Morgan Stanley and Merrill Lynch?

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    Tell me what is going on here, how would Morgan Stanley and Merrill respond to these stories? There must be another side to this, because it appears that either they honestly just did an absolutely **** job of pricing the stock, or deliverately over-discounted to give their mates a fat payday. Either way didn't they screw over their client...

    Was LinkedIn Scammed? - New York Times

    The company had hired Morgan Stanley and Bank of America’s Merrill Lynch division to manage the I.P.O. process. After gauging market demand — which is what they’re paid to do — the investment bankers priced the shares at $45. The 7.84 million shares it sold raised $352 million for the company. For this, the bankers were paid 7 percent of the deal as their fee.

    For a small company with less than $16 million in profits last year, $352 million in the bank sounds pretty wonderful, doesn’t it? But it really wasn’t wonderful at all. When LinkedIn’s shares started trading on the New York Stock Exchange, they opened not at $45, or anywhere near it. The opening price was $83 a share, some 84 percent higher than the I.P.O. price. By the time the clock had struck noon, the stock had vaulted to more than $120 a share, before settling down to $94.25 at the market’s close. The first-day gain was close to 110 percent.

    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.

    As Eric Tilenius, the general manager of Zynga, wrote on Facebook: “A huge opening-day pop is not a sign of a successful I.P.O., but rather a massively mispriced one. Bankers are rewarding their friends and themselves instead of doing their fiduciary duty to their clients.”

    Suppose, he wrote, your trusted real estate agent persuaded you to sell your house for $1 million. Then, the next day, the same agent sold the same house for the new owner for $2 million. “How would you feel if your agent did that?” he asked. That, he concluded, is what Merrill and Morgan did to LinkedIn.
    CONGRATULATIONS, LINKEDIN! You Just Got Screwed Out Of $130 Million - Business Insider

    How?

    By wildly underpricing the deal and selling LinkedIn's stock to institutional clients way too cheaply.

    LinkedIn's stock is trading above $80 a share this morning. Bank of America and Morgan Stanley sold the same stock to their best institutional clients at $45 a share last night. The value of LinkedIn-the-company, it seems safe to say, has not appreciated by 90%+ in the past 12 hours. And that means that, on its underwriters' advice, LinkedIn sold its stock too cheap. It also means that the institutional investors who bought LinkedIn's stock last night are high-fiving each other this morning, celebrating their instantaneous 90% gain. (Lots of them are probably also dumping some stock).

    By underpricing the stock, Morgan and BOFA gave their best institutional clients a gift of at least $175 million. And that money came out of LinkedIn's pockets and the pockets of the LinkedIn shareholders who sold on the deal
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    The excuse given for slight underpricing (IPO discount of 3-10%) is usually something along the lines of "we need to keep institutional investors interested" because it is a special situation and about the only time when a basically unknown company is issuing that large a block of shares to the public.

    For an IPO like LinkedIn... well not much excuse for not gauging the demand, but keep in mind that pre-IPO people called the valuation excessive - very hard to come up with a value for a company with little/ no profits, no good comparables and with a prominent M&A deal in the space being done at a much lower valuation (p/s, p/user) just prior. Also not sure what the price hike was driven by - if it had been this apparent then surely books must have been covered multiple times at the high end so why not increase the range? Wouldn't have gone as high as this but still. In their pitches, banks do NOT want to show how the price of their IPOs falls after issue though - original shareholders don't really like this either because they keep a lot of shares for themselves.

    Anyway, not much excuse for them. Unfortunately though, it happens a lot.
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    The bankers have to be able to rationalise their valuation, whilst the market can put an irrational valuation on a company.

    This is the main cause of this discrepancy.
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    That is the first thing i thought of when i read it closed on $94.25, but then i look at the valuation and even $45 seems to genorous, if Google traded at the same level price to earnings, it would be valued at $1.2 trillion!

    If this is not bubble material then i don't know what is.
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    Linkedin got ridiculously overpriced

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Updated: May 22, 2011
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