On Thursday, the social media stock LinkedIn hit the street with a stunning IPO that was reminiscent of the glory days of the dot com era. It opened at about $80 USD and traded over $120 before closing it’s first day on the markets at $94.25.
IPOs fascinate me because, unlike most stock transactions where two parties, each with some limited amount of information about the company (hopefully relatively equal amounts of information) from which they derive differing views (i.e. one thinks it’s a buy and one thinks it’s a sell), with an IPO it is not a level playing field at all – it is the owners of the company who are selling.
This deserves some further discussion: who knows more about the company than the owners? Who is more indoctrinated into the potential success of the company than the people who created it? And these people are looking to sell.
Meanwhile, other investors line up for the privilege of paying even more than what the owners are asking for, (which is usually already more than they could have hoped for to begin with).
In the case of LinkedIn, the owners originally agreed to sell most of their shares at a valuation of approximately $3.3 billion. But the market said no, that wasn’t enough, and pushed the IPO level to $4.2b. Then on Thursday when trading began, hungry buyers had pushed the price up to $7.5b and within an hour and a half, it was trading at over $11b before eventually finishing the day at just under $9 billion.
In other words, some investors were willing to pay almost 4 times what the people who knew more about the company, and cared more about the company than anyone else on the planet, were more than willing to sell it for.
I am not here to say those investors are wrong *cough* or crazy, simply that it is, at the very least, bold. And while it is also true that after the initial trading frenzy, IPOs tend to settle back down, that does not necessarily mean that will happen in this case.
But it will be fun to watch.