It’s like the dot.com days all over again. Tech start-up LinkedIn just had their initial public offering (IPO) and pocketed something like $130 million for the company. The stock (LNKD) was set to open at $45 a share, but it opened closer to 85 and shot up to a high of around $120 before the day was out. (As of this writing it’s down around $90 again.) That sure sounds exciting, but who really profits when a stock pops like that on open? One thing’s for sure, it isn’t LinkedIn.
Morgan Stanley and Merril Lynch were the investment bankers who supposedly did the due diligence for the LinkedIn board. Lot’s of folks are taking note of
these shenanigans, this oversight, but few are mentioning some of the reasons it is allowed to happen.
The investment banks are hardly incentivized to offer the maximum amount the stock will fetch to the newly traded company. If they don’t come up with that cash, it’s likely to come out of their pockets, and there won’t be much to reward their investors with before the IPO if those investors get the same price you and I get. The disturbing thing is that the executives at LinkedIn aren’t incentivized much either. When the company is valued very low and pops like this one did during it’s IPO, the stock options that executives hold shoot up like crazy and make them rich (on paper anyway; they can’t sell for a while) over night.
So where’s the harm? Who gets hurt? Well, LinkedIn for one. Instead of over $300 million to expand their business, they only get $130. Hardly pocket change, but missing out on all that value may be the make-or-break for them over the long run. You can bet that some of the better dot.com ideas might have survived if they’d actually gotten what they deserved on the stock market.
Of course, investors are hurt as well. They are led to believe they are investing in a company with a chance to grow, but the company is hampered from the first moment as $100 million of stock buyers cash is pocketed by pre-IPO investors on opening day. It’s buyer beware and savvy investors know it. Hopefully, they weigh their chances before acquiring the stock. Still, it certainly sounds like a flaw in the system, doesn’t it?
It’s the goal of many small tech firms to go public, and it’s a sound one at that. If your company’s goal is not only to get rich, but to ensure that your world-changing idea gets out in to the world, an IPO may be the only way to reach a big enough market. Just remember, people perform to their incentives. Think first about what’s motivating your board, your executives, and your investment bankers.