How Microsoft avoided the IPO scam that LinkedIn just fell for(yllus.com)
yllus.com
How Microsoft avoided the IPO scam that LinkedIn just fell for
http://yllus.com/2011/05/21/how-microsoft-avoided-the-ipo-scam-that-linkedin-just-fell-for/
20 comments
I'm not a finance guy </disclaimer>
I think the closing price of the first day is irrelevant, my understanding is that the opening price is the issue. LNKD started trading above $80 a share, while the bankers priced the shares at $45 -- a huge delta that means that their customers realized a large windfall instantaneously and LNKD could have raised nearly twice the capital at the same dilution.
Compare that to MSFT, which was sold by the company at $21 while the first trade was $25.50 (http://blog.seattlepi.com/microsoft/2006/03/16/looking-back-...) -- a much smaller gap.
Once it's on the open market, anything can happen. The issue at hand is if the bankers low-balled LNKD in order to guarantee huge returns for their institutional customers, short-changing the company.
A note to all not-yet-public companies: the banks are not on your side.
I think the closing price of the first day is irrelevant, my understanding is that the opening price is the issue. LNKD started trading above $80 a share, while the bankers priced the shares at $45 -- a huge delta that means that their customers realized a large windfall instantaneously and LNKD could have raised nearly twice the capital at the same dilution.
Compare that to MSFT, which was sold by the company at $21 while the first trade was $25.50 (http://blog.seattlepi.com/microsoft/2006/03/16/looking-back-...) -- a much smaller gap.
Once it's on the open market, anything can happen. The issue at hand is if the bankers low-balled LNKD in order to guarantee huge returns for their institutional customers, short-changing the company.
A note to all not-yet-public companies: the banks are not on your side.
According to the numbers on eHow, the first day arithmetic returns (relative to IPO price, not the opening trade price) were, at close: (27.75-21) / 21 = 32.1%, and at day's peak: (29.25-21) / 21 = 39.3%
The prices I used are from a site on eHow: http://www.ehow.com/about_5077008_microsoft-stock-split-hist...
The prices I used are from a site on eHow: http://www.ehow.com/about_5077008_microsoft-stock-split-hist...
Here are some details of trading on the day of the offering:
"Microsoft had its initial public offering on March 14th, 1986. Microsoft was initially priced at $21. However, due to intense demand, the stock first traded at $25.50. Microsoft peaked the first day at $29.25 The stock closed on the first day at $27.75. The stock had a volume of over 3.5 million shares, larger than the 3 million shares offered in the IPO."
Source: Microsoft Stock Split History | eHow.com http://www.ehow.com/about_5077008_microsoft-stock-split-hist...
Source: Microsoft Stock Split History | eHow.com http://www.ehow.com/about_5077008_microsoft-stock-split-hist...
Thanks for the source - I had a vague idea of the numbers. I am now trying to find the first week and month performance, because IIRC it went very very well.
LinkedIn and Microsoft both listed with similar revenue numbers (adjusted for inflation, $266M for MSFT vs $240M for LinkedIn) except LinkedIn are growing a lot faster, and Microsoft had a 35% net margin with no long term debt (almost all self funded) vs $105M raised by LinkedIn and still in growth/development stage. Very different market caps at list time, but the market fixed that for MSFT over the years afterwards
LinkedIn and Microsoft both listed with similar revenue numbers (adjusted for inflation, $266M for MSFT vs $240M for LinkedIn) except LinkedIn are growing a lot faster, and Microsoft had a 35% net margin with no long term debt (almost all self funded) vs $105M raised by LinkedIn and still in growth/development stage. Very different market caps at list time, but the market fixed that for MSFT over the years afterwards
Yahoo Finance has the first week and first month prices. According to Yahoo Finance, the first day of trading was March 13, 1986, which is one day earlier than the date that is on the eHow article I linked to. I think March 13 is correct (it matches the date on a file I found on Microsoft's website for calculating the value of shares purchased from IPO: http://www.microsoft.com/investor/Downloads/Stock%20Informat...)
Here's a link to the Yahoo Finance page I mentioned (prices rounded to quarter of a dollar): http://finance.yahoo.com/q/hp?s=MSFT&a=02&b=13&c...
According to the numbers on Yahoo Finance, the first week arithmetic return (relative to IPO price, not the opening trade price) was, at close on March 19: (28.25-21) / 21 = 34.5%, and the first month return was, at close on April 11: (28.75-21) / 21 = 36.9%
Here's a link to the Yahoo Finance page I mentioned (prices rounded to quarter of a dollar): http://finance.yahoo.com/q/hp?s=MSFT&a=02&b=13&c...
According to the numbers on Yahoo Finance, the first week arithmetic return (relative to IPO price, not the opening trade price) was, at close on March 19: (28.25-21) / 21 = 34.5%, and the first month return was, at close on April 11: (28.75-21) / 21 = 36.9%
I was surprised to learn that Sun, Oracle, and Microsoft went public within days of each other in March 1986. What a week!
For an industry founded on the bedrock principle that the efficient allocation of capital is king, IPO mechanics strike me as inefficient: Money on the table, expensive fixers, etc. Auctions seem like a superficially more efficient mechanism for pricing an IPO and distributing shares. How about this:
Solicit bids for shares. After bidding, sell all shares to the bidders for the highest price at which all shares are sold.
(I suspect that this would also work well for concert tickets.)
Solicit bids for shares. After bidding, sell all shares to the bidders for the highest price at which all shares are sold.
(I suspect that this would also work well for concert tickets.)
And this is essentially how Google IPOed, using a "Dutch" auction.
MSFT's IPO was 25 years ago, at the dawn of the Information Age. LNKD was post-Google (and post-GOOG) and, well, have access to an automated system for finding friends of friends who are the best experts in the word on any topic, including IPO pricing.
They have no excuse for leaving so much money on the table.
I have always wondered why the big banks were so eager to work an IPO - surely there must be more money in playing the market.
Which makes me think: couldn't a company simply get a law firm to write and file the documents needed? I realize that it would cost a lot of money, but it must still be cheaper than being taken to the cleaners by the banks.
Which makes me think: couldn't a company simply get a law firm to write and file the documents needed? I realize that it would cost a lot of money, but it must still be cheaper than being taken to the cleaners by the banks.
Preparing for an IPO is tough enough on senior management at the company as it is, let alone having to arrange underwriting, vendor placings, etc, without qualified professionals holding your hand. Lawyers know the law, not the market.
Also, who would do the pricing (flawed as it may be?)
Also, in the UK, a 'sponsor' (typically, a financial institution, like an ibank - http://www.fsa.gov.uk/pages/Doing/UKLA/sponsors/index.shtml) is very often required, by law and by stock market listing/trading rules, to be involved throughout a stock offering to the public. Sensible, or regulatory capture? It may be a bit of both.
Likewise, it's tricky for lawyers here to advise on the offering of shares to the public (it's a "regulated activity" per s21 of the Financial Services and Markets Act 2000 - http://www.legislation.gov.uk/ukpga/2000/8/section/21 )
Also, who would do the pricing (flawed as it may be?)
Also, in the UK, a 'sponsor' (typically, a financial institution, like an ibank - http://www.fsa.gov.uk/pages/Doing/UKLA/sponsors/index.shtml) is very often required, by law and by stock market listing/trading rules, to be involved throughout a stock offering to the public. Sensible, or regulatory capture? It may be a bit of both.
Likewise, it's tricky for lawyers here to advise on the offering of shares to the public (it's a "regulated activity" per s21 of the Financial Services and Markets Act 2000 - http://www.legislation.gov.uk/ukpga/2000/8/section/21 )
Why couldn't Microsoft say to Goldman: "If the average price on the first day is more than 30% of what we get, your commission is reduced"
?
For a setup with conflicts of interest left right and centre, you end up adding another: a bank wanting to depress the share price once it hits a threshold. Who, if that were to happen, would buy a share knowing Goldman's eagle eyes are on it, ready to slap it back down to 30%?
That's the problem. All commission details are negotiated before hand. Bankers even have the right to issue some more stock after the listing if they find the listing to be profitable.
[deleted]
Avoided? Microsoft's stock price went on to increase 600X. Anyone who could get in on the IPO stood to make millions.
However, unlike LinkedIn, it took longer than a few minutes on the stock market.
Microsoft was up nearly 100% on the first day, and closed somewhere around 50-60% up.
Yeah, it took a few hours.
Microsoft did no different to LinkedIn, Gates actually wanted to price the stock lower to assure that a liquid market would be created. They re-priced the listing late in the process, just like LinkedIn did.
Most of the Microsoft negotiation with Goldman was about commission charges.
This was all the same thing, both hot stocks who could dictate a lot of their own terms. The only difference is that we got a good insight into the Microsoft process via that Fortune article and the only insight we got into LinkedIn were press releases (most announcing another tilt up in the price)
See my last comment about how list pricing works and why nobody got 'ripped off':
http://news.ycombinator.com/item?id=2571248