The point of an initial public offering is for a company to raise money. It sells shares of itself to the public in exchange for cash that can be used to expand, invest, what have you. Naturally, companies want to sell shares for the highest possible price, generating the most amount of cash for the least amount of dilution to existing owners.
Think of it this way, and you see why many have panned LinkedIn's
Whose fault is this?
Wall Street's. So says Henry Blodget:
LinkedIn's underwriters, Morgan Stanley, Bank of America, et al, just screwed the company and its shareholders to the tune of an astounding $175 million ... How? By wildly underpricing the deal and selling LinkedIn's stock to institutional clients way too cheaply.
Blodget then uses a great example most of us can wrap their heads around:
Imagine 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 by telling you this was the best price she could get. And then, the next morning, the person who bought your house immediately turned around and sold it for $2,000,000 (using the agent to sell it, naturally).
Those "best clients" in the case of an IPO are institutional investors who get to purchase shares at the initial offering price, before shares hit the open market. These are the folks who made a fortune from LinkedIn's IPO, buying shares for $45 on Wednesday and being able to sell them for $122 on Thursday. Easy money.
This isn't a terrible thing. There's usually a "pop" during IPOs. There should be, otherwise institutional investors wouldn't buy IPO shares. They'd just wait until the next day and purchase them on the open market.
But a 100%-plus surge like LinkedIn saw last week is outrageous. LinkedIn hired bankers to gauge public interest and properly price an offering. It paid them lots of money to do this -- about $28 million, or almost twice its profits over the past year. They failed. And while those bankers would have received an even higher fee had they priced the offering properly, the mispricing made their institutional clients very, very happy -- a feat that will pay even larger dividends down the road. The underwriting banks leave very little money on the table after mispricing an IPO.
That, I think, is the real wrongdoing here. That LinkedIn's dealmakers -- Morgan Stanley
Fool contributor Morgan Housel owns B of A preferred. Follow him on Twitter @TMFHousel. The Fool owns shares of Bank of America and also holds a short position in the stock in a different portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.