How Wall Street Hustled LinkedIn

Linked In
Linked In

The stock of LinkedIn opened explosively Thursday morning, rising to more than 100 percent of its IPO price.

This means the favorite clients of LinkedIn’s underwriters—Morgan Stanley, Bank of America Merrill Lynch and JPMorgan Chase—are making a fortune. They got to buy in at $45 a share—and have doubled their money instantly.

It also means that LinkedIn’s owners and investors just got swindled.

LinkedIn relied on its Wall Street bankers to determine a fair market price at which to offer its shares to the public. JPMorgan , Bank of America and Morgan Stanley told them that they should come to market at $45 a share, which would raise $352.8 million—minus fees to lawyers and investment bankers.

Everyone knew the shares would rise on the open. This happens with hot companies and represents a kind of additional underwriting fee for companies going public. It’s just the vig— the rather negative term used to describe an amount charged by a bookmaker—they have to pay to do business with Wall Street.

But a 100 percent rise is evidence that LinkedIn’s shares were wildly, almost fraudulently, underpriced. The bankers either had no clue about the price people are willing to pay for the shares—or they decided to grant their best institutional investment clients a bonanza at the expense of LinkedIn. In either case, LinkedIn gave up $350 million for this mispricing.

Let’s use a simply analogy adapted from my old boss, Henry Blodget.

This is as if the trusted real-estate agent you hired to sell your house persuaded you to sell it to her best client for $1,000,000. This is the best price she can get you, the agent says. But the very next morning, the person who bought your house immediately turns around and sold it for $2,000,000. And, of course, the very same agent helps her sell the house.

Would you suspect that the agent was really working for the guy who flipped your house for a 100 percent gain? Of course you would.


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