This story was interesting. In LinkedIn's first day of trading (LNKD), it more than doubled from the IPO price of $45/share, closing over $94/share. Approximately 10% of the shares of LinkedIn, valued at approximately $300M, were offered in the IPO.
The spin is "Hooray for LinkedIn!" Actually, it's a disaster for pre-IPO shareholders. Do you see why?
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When an IPO has a huge opening day spike, THAT MEANS THE PRE-IPO SHAREHOLDERS WERE ROBBED. Shares were sold for $45/share when they could have fetched $90/share. In effect, the pre-IPO shareholders sold 10% of the business for less than half it was actually worth.
The pre-IPO shareholders sold $600M of equity for only $300M. Where did that $300M difference go? It went into the pockets of the banksters.
There are alternate systems that would be fairer. Of course, they would never be implemented. For example, shares could be priced via a "dutch auction" like Google did. Also, only sell a tiny slice of the corporation at IPO, minimizing loss if it's mispriced.
Here's a radical reform that would be never be implemented, because it would threaten insiders. The IPO could be handled via the NYSE or NASDAQ, using their usual opening price discovery algorithm.
Here's how that would work. The IPO corporation enters an order "sell 10M shares limit price $40 at open". Then, the stock market has its usual opening price auction, including the IPO order as a regular sale. Anyone who wants to buy the IPO places a regular buy order to the NYSE or NASDAQ. The opening price would be the price where buy demand equals shares offered. All the extra revenue would go to the pre-IPO shareholders, rather than to insiders via an opening day spike.
Insiders love the current system. The IPO process artificially depresses share prices. Insiders buy at a discount, then flip for a practically guaranteed profit. Reform will not occur. The banksters love ripping off the pre-IPO shareholders, while pretending that the opening day price spike is a wonderful thing. Only a bankster would cheer at how wonderful it is, as he robs you.
As an individual investor, you're an idiot to buy on the IPO day or in the first 6 months of trading. For example, an ex-coworker bragged about buying PALM for $130/share at its first day of trading in PALM's 2000 IPO. That didn't work out for him.
Most insiders have agreements and SEC rules banning them from selling during the first 3-6 months after the IPO. There's a limited supply of shares, making it hard to borrow shares for short selling. (However, naked short selling is frequently common after a hot IPO. For example, NYMEX wound up on the SEC's SHO list immediately after its IPO.)
It's a bad idea to invest in a "hot" IPO. There are short sale restrictions. Insiders cannot sell. That leads to an artificially inflated price. It's better to wait 6 months, until the restrictions lapse. For some IPOs, like the NYSE, there were restrictions on insiders selling for 3 years. (When the NYSE converted from a member-owned nonprofit to a public for-profit corporation, the former seatowners were barred from selling all their shares for 3 years.)
State comedians were saying "Hooray! LinkedIn shares spiked on the first day of trading!" Actually, that means the pre-IPO shareholders were ripped off by the banksters. They sold part of their equity for much less than what it was actually worth. The pre-IPO investors don't mind, because they made a bundle after the price pop. They still were robbed, by an amount equal to the difference between the IPO price and the opening day closing price, times the # of shares sold at IPO.
In the case of LinkedIn, the pre-IPO shareholders undervalued their offering by approximately $300M. That's a wealth transfer from the people who built a business to the banksters.
Friday, May 20, 2011
The Banksters Stole $300M From LinkedIn Pre-IPO Shareholders
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12 comments:
FSK is spot-on. The gubbermint is obligated to its masters, the banksters. And since bank deposits in the form of savings has been minimal, therefore the banksters no longer invest for their customers and depositors, they invest for themselves using insider shills and shielding themselves with gubbermint.
You have to break this down more for me. What forces a pre-ipo shareholder to sell at the opening, lower price?
If you are a shareholder 90 is better than 45.
Interesting, educational and obvious once you mention it.
Amazing how all this common sense stuff is not discussed in the media. But not surprising given who owns and controls mass media.
Anonymous #2:
Some of the shares sold at IPO were new shares issued by LinkedIn. Those shares were sold for $45 when they were really worth $90.
The pre-IPO shareholder had his equity diluted. In return, LinkedIn got more cash on hand. The "new cash on hand for LinkedIn" was insufficient compared to "dilution of shareholder equity".
In effect, wealth was transferred from the pre-IPO shareholder to the shareholders who bought at $45.
It actually opened at $83, 84% higher than the IPO price. How does this work? Did people actually sell at $45 before opening?
The IPO shares are sold at $45/shares the night before.
Then, people who bought at the IPO for $45/share may then sell at the opening.
Plus, there is some naked short selling.
Oh, wow, I had no idea. That is a very important detail that has been left out of every article I've seen about IPOs.
So, this $45 group, this is not open to the public then, it's a private offering? Who can buy the night before? How are they selected?
The investment bank and its favored customers may buy at the official $45/hr IPO price. Everyone else has to wait until trading starts the next day.
You didn't know that? I thought that was common knowledge.
So let me get this straight. The investment bank, the same investment bank that set the IPO price which across the system we know produces undervalued IPO prices, also sets it up so they are the only ones that get to buy at that price. After they have bought at that price, which they set, then they never hold any shares as an investment, but instead immediately flip them for twice what they paid, the next morning.
And this is not a conflict of interest, fraud, a conspiracy, or illegal.
Have I got it now?
Yes, the investment bank (and its preferred customers) are the only ones who get to buy at the IPO price.
Actually, I haven't still fully described the evil.
We haven't even talked about the "green shoe" yet. I'll leave you to enjoy reading about that on your own, before reading the next paragraph.
Via the "green shoe", the IPO corporation gives the investment bank a call option to buy *MORE* shares at the IPO price. The official reason is that it gives the investment bank an incentive to support the IPO.
Obviously, the system is completely set up so the investment bank has an incentive to understate the price. It's money stolen from the pre-IPO shareholders and given to the investment bank. It's accepted as a "cost of doing business" as a public corporation.
It's like you sold your house for $500k. Then, the guy you sold it to immediately flips it for $1M, via the same real estate agent. That would make you wonder if the real estate agent was really looking out for you.
The whole stock market is a fraud. Buy gold and silver instead. Take physical delivery.
If you really want to learn how the scam works, look up the words: (Federal Reserve Primary Dealers).
You will find how the thugs in the "Primary Dealers" are as equally corrupt as is the Federal Reserve and the Treasury Dept. They have become (_._)
I already know about the Primary Dealers. Those are the banks that get to borrow directly from the Federal Reserve at the Fed Funds Rate.
The Primary Dealers get to borrow from the Federal Reserve and lend to the Federal government via buying Treasury debt. They make a guaranteed riskless profit.
The Primary Dealers borrow from the government and lend to the government, collecting economic rent.
The blog "zerohedge" has a lot more good bits on them.
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