LinkedIn Deal a Goof, not a Greed-fest

LinkedIn Deal a Goof, not a Greed-fest

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People accuse Wall Street of many things, but rarely of clairvoyance. That was the charge leveled by Joe Nocera in a New York Times column Saturday. Mr. Nocera pilloried investment banks Morgan Stanley and Merrill Lynch for grossly under-pricing the IPO of LinkedIn. As he points out, the social media company was sold to investors Thursday for the first time at an offering price of $45 per share; the stock actually opened on the NYSE at $83, topped out above $120 and closed that day at $94. Mr. Nocera says the bankers “must absolutely have known” the stock would soar; he deems the deal yet another example of Wall Street rewarding their best customers while ensuring that the playing field is never, ever, level.

Many months from now, Mr. Nocera will doubtless pen a follow-up piece, in which he excoriates brokers for having driven their clients into overpriced social media stocks. Consider: the offering price of $45 valued LinkedIn at about 40 times its 2010 revenues and 400 times earnings. It also was offered at about two times the price recently set by those trading shares of privately held companies – a relatively new opportunity afforded by companies like Nyppex. In the past, deals were priced without the information provided by these new trading sites.

What drove the price of LinkedIn higher was retail buying. The Financial Times reports that trading in the shares constituted an astonishing 5.3% of TD Ameritrade’s volume on Thursday – Apple accounted for only about 1.5%, for instance.

Why the excitement? LinkedIn was the first of the eagerly-awaited social media stock offerings. It is the precursor for Groupon, Twitter, Zynga and of course, the granddaddy of them all – Facebook. These are the hot names of commerce today, but so far they have been privately owned and thus off limits for investors. Existing tech names, like Apple and Google, have prospered and rewarded shareholders, but they have also become grown-ups, with grown-up problems. LinkedIn is like a three-year old running in the Derby; the potential is not yet known. That’s much, much more exciting.

It is also much, much riskier. It’s especially risky at 40 times revenues. Those kinds of valuations have conjured up memories of the dot-com boom, when companies went public with business models that made no sense and projections that should have cost (and indeed occasionally did cost) analysts their jobs. It has been pointed out that LinkedIn and its brethren are far sounder than many of those earlier tech five-minute wonders. That appears true, but it is also true that many may ultimately disappoint. The tech world changes in a heartbeat; it makes the Middle East look solid. Valuations should take into account the rise and swift collapse in expectations for companies like Friendster, Bebo, and MySpace

They also should take into account warnings from LinkedIn management that the company may post a loss this year as it pushes the growth clearly anticipated by investors.

Mr. Nocera is correct that the bankers in this offering made money; they also dealt a sweet hand to those clients lucky enough to get in on the deal. He is wrong, however, to assume that Morgan Stanley and Merrill knew that the stock would shoot out of the gate with quite such abandon. After all, they are still hoping to be selected for the offerings to follow. LinkedIn management, while doubtless pleased their deal was such a success, must also be wondering what they might have been able to do with the money left on the table. My guess: the next seller may go elsewhere.

After more than two decades on Wall Street as a top-ranked research analyst, Liz Peek became a columnist and political analyst. Aside from The Fiscal Times, she writes for FoxNews.com, The New York Sun and Women on the Web.