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LinkedIn's Huge Gains Mostly Go to Big Investors—Again

LinkedIn's initial public offering will go down in the record books as one of the most stunning stock debuts in recent market history, but the returns to small investors were far smaller than to the big guns.

Linkedin founder Reid Garrett Hoffman (C) and CEO Jeff Weiner (2nd R) at the ringing of the opening bell of the New York Stock Exchange May 19, 2011 during the initial public offering of the company.
Stan Honda | AFP | Getty Images
Linkedin founder Reid Garrett Hoffman (C) and CEO Jeff Weiner (2nd R) at the ringing of the opening bell of the New York Stock Exchange May 19, 2011 during the initial public offering of the company.

Big institutional funds made a killing off a stock they were allowed to buy for $45 and sell on the open market for $83 and up. The stock had registered a jaw-dropping gain of 137 percentby midday trading.

As for the little-guy retail investor? He or she didn't have nearly as a good a day as the price gain in the LinkedIn stock might suggest.

There was virtually no retail participation in the IPO, meaning that the $45 price from which the stock's opening-day gain was measured didn't paint a true picture of the gains available for the average investor.

To be sure, this is how most IPOs work. Big funds willing to take on the risk of a company stepping its toes into the public trading waters can buy shares in big blocks and always get first crack before the public.

But the numbers involved with the LinkedIn IPO were dizzying and suggesting to some that Wall Street had formed a barricade around the companythat would sucker in smaller investors after the fact and let the big firms stow away the lion's share of the profits.

"You get all the retail guys buying in after the opening because they didn't get allocation," says Dave Rovelli, managing director of US trading at Canaccord Adams. "I told anybody who would listen that I would short the hell out of this thing after it opened."

Alas, as Rovelli notes, it's extremely difficult to short-sell an IPO until it's on the market for at least 30 days. But the temptation was still there.

Consider: first projections showed the IPO price likely in the $32 to $35 range. The final price in the deal handled by Morgan Stanley escalated to $45, a 40 percent difference from the low end of projections.

Then consider that the first trade for LinkedIn came in at a nearly unfathomable $83—fully 84 percent higher than big firms like Wellington and Fidelity paid for their shares.

Fair? Perhaps not. But welcome to Wall Street.

"This is awesome, this is fantastic news for equities, for retail investors, for financials," says Todd Schoenberger, managing director of LandColt Trading in Lewes, Del. "This generates incredible trading demand."

Indeed, more than 17 million shares of LinkedIn traded hands by noon—more than four times the amount of Goldman Sachs , for instance—and even investors who didn't get the IPO price were still ahead 23 percent for the day.

"It may seem high-priced at $80 or $90 a share," Schoenberger says. "But it's probably at a discount."

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