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The underwriters also have a responsibility to all involved not to over price the ipo to take advantage of transient demand. If they do, and the stock ends up u
by trotsky 15y ago
The underwriters also have a responsibility to all involved not to over price the ipo to take advantage of transient demand. If they do, and the stock ends up under water within a few days to months they run a serious risk of pissing off both their investing clients and the newly public company. Opening down or trading below what the stock priced at in the short term has a strong stigma attached to it and can make retail and institutional investors think there is something systemically wrong with the company regardless of the fundamentals.
There was an editorial in the WSJ on friday that strongly suggested the price action in LNKD has to do with the current easy credit environment driving money into riskier assets. I agree this seems likely. Certainly it seems difficult to justify the valuation on any traditional metric. If when pricing the ipo Morgan also felt that any frothy demand was based more on the easing environment than real interest in LNKD as a company, perhaps they were right to hold the pricing a bit more conservative than the market was suggesting.
After all, they already had increased it by almost 33%, and the current QE program is scheduled to shut down in June. Many smart people appear to be betting on interest rates climbing after the program ends, that may take enough money out of the market to cause someone like LNKD to correct.
Another thing to keep in mind is that LNKD offered a relatively small amount of stock as compared to many offerings. This kept supply low and could have contributed to the large pop, but also means that they probably have plenty available for a potential secondary offering, which could allow them to profit from these very price moves down the line,
- vladd 15y agoThe factors you've mentioned should have been already priced by Morgan in the opening price proposal (low share supply, low interest rates etc). They are reasons which justify why the shares traded so high, which in turn proves that it was foreseeable by Morgan to know that.
- trotsky 15y agoI just woke up so I'm not sure if I'm conveying my point well. My suggestion is that these factors can combine to create a short term unsustainable pricing situation. If Morgan Stanley believes in their heart of hearts that the stock won't be able to support more than a $50 price by Aug 1, they should be loathe to price at $80 and see it fall. This won't just kill their ability to get future offerings subscribed, but also can weigh heavily on the trading of the stock long term which could easily get in the way of any secondary offerings. Besides, who can say that they actually could have floated the stock at $80? Just because some retail investors or momentum traders bought at $80-$100 on the first day doesn't mean they could have moved the whole volume of stock at that level, especially to some of their institutional clients. Just because you could potentially find one guy out there to buy one share of LNKD at $1000 doesn't mean it's a reasonable price for it or that you could find anyone to buy 100,000 shares at $1000 - but you could still get a print off of that one share transaction. None of this is meant to say that I trust investment banking firms a lick, or I'm sure Morgan did the right thing here. I'm just trying to suggest that it's a much more complicated situation than the NYT and the Zynga sound bite might suggest.
- michaelochurch 15y agoThis won't just kill their ability to get future offerings subscribed, but also can weigh heavily on the trading of the stock long term which could easily get in the way of any secondary offerings. Wrong. Underpriced IPOs (almost all of them) have been welfare for well-connected friends-of-investment-wankers for quite some time. The idea that banks would have trouble allocating public offerings is laughable. The claim that banks need to underprice IPOs for some systemic reason is laughable. It's a back-filling rationalization for spinning, which would otherwise rightly have bankers in federal PMITA prison.
- trotsky 15y agoI'm not going to disagree with you that there are bad things that go on with IPO allocations. But I think you misunderstand - I'm not saying investment banks are required to underprice IPO's to get them fully subscribed, but clearly they need to avoid over pricing the shares if they expect to keep selling them. I think you have a fundamental misunderstanding of the process if you believe that Morgan could consistently over price new offerings and subsequently see them fail/go under water and yet still be able to keep selling these over priced issuances to their clients and institutions.
- michaelochurch 15y agoI think they should fairly price the IPO, not overprice it.
- RickHull 15y agoYou are looking at the market price today. Morgan Stanley's consideration is the market price in the future. I believe the market price today is overvalued, and it will come down in the future.
- deleted 15y ago[deleted]
- davidw 15y ago
- syllogism 15y ago> The factors you've mentioned should have been already priced by Morgan in the opening price proposal (low share supply, low interest rates etc). They are reasons which justify why the shares traded so high, which in turn proves that it was foreseeable by Morgan to know that. Hindsight's 20/20. We could just as easily be sitting here weighing up all the information Morgan Stanley had that should have told them not to give such a high valuation.
- neilc 15y agoOpening down or trading below what the stock priced at in the short term has a strong stigma attached to it and can make retail and institutional investors think there is something systemically wrong with the company regardless of the fundamentals. I understand there's a stigma, but why does the stigma exist? Let's just assume that the investment bank's only goal is to accurately predict the demand for a new IPO, and to set the offer price accordingly; why is overpredicting demand stigmatized whereas underpredicting is not?
- biot 15y agoThe same way that selling someone a house for $1 million and the next day it's worth $900K looks bad on the seller since they're promoting it as a good investment.
- davidw 15y agoIf I sold a house to someone for 200,000 and they told me it was a good deal, I'd be very irate to find that they'd turned around and sold it for 400,000 the next day.
- ceejayoz 15y agoSure, but you built the house for a few grand. I can't imagine the LNKD investors are too disappointed about a $300+ million payday.
- davidw 15y agoThey certainly made their pile, so I guess they're not 'unhappy', but still, it just seems that the only sensible thing to do would be to use a market to determine prices. That's what they're there for, right?
- davidw 15y agoAlso: with all the 'blah blah' that you hear about companies taking uncomfortable decisions due to a "fiduciary duty to shareholders to maximize profits", taking this sort of hit seems quite askance.
- rhizome 15y agoWhat makes the overpricing stigma more rational than the lack of stigma in underpricing? There's a huge gray area here between $45 and the $85 open that speaks to credibility, and I don't think anybody's saying it should have been priced at $90+ just because it popped to $140.