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May 30, 2011 7:25 pm
A prominent Facebook investor and director accused Wall Street of undervaluing the LinkedIn initial public offering earlier this month, contributing to the doubling of its shares on opening day.
Peter Thiel, an early Facebook investor and co-founder of PayPal, said banks did not understand the full potential of the latest internet companies and warned that the next Silicon Valley darlings would negotiate hard when their turn comes to go public.
“Whenever a stock price goes up as much as it does with LinkedIn, you assume the IPO was mispriced and the bankers screwed up,” said Mr Thiel, an investor in LinkedIn since its launch. “There continues to be a certain antipathy by Wall Street banks toward Silicon Valley companies where they don’t quite believe it’s real.”
The stock leapt more than 100 per cent in its first day of trading, generating hundreds of millions of dollars for special clients of the underwriting banks, who received allotments of the stock, and for day traders who ran up the price.
Critics of the process have said the stock should have been priced higher, allowing LinkedIn itself to raise more money.
“New internet companies based on new and innovative technologies are more difficult to value,” said Richard Green, professor of financial economics at Carnegie Mellon University.
But the average underpricing for IPOs is about 15 per cent, Mr Green said, not 100 per cent as was the case with LinkedIn.
“Professors find it frustrating that no one seems to learn these lessons because the cycles repeat,” he said. “I don’t understand why competitive forces don’t drive this kind of egregious underpricing out of the system.”
In the coming months, several internet companies such as Groupon, Zynga, Twitter and Facebook, are likely to be in a position to demand more favourable terms from bankers.
They can make the compensation of the underwriting banks contingent on how much money is left on the table, said Jay Ritter, a professor of finance at the University of Florida who studies IPO mispricing. Or, they hire multiple banks and pay a higher percentage of the fee to the one that comes in with the highest price, he said, or, they can simply set a higher price range from the outset and choose a bank willing to negotiate from that starting point.
Analysts say they could look at auctioning stock as Google did when it went public.
“When you run an auction, only the purchaser, the investor, has responsibility for the price,” said Lise Buyer, an IPO consultant who guided Google through its auction. “They pay whatever they want for whatever they want.”
Mr Thiel said there would be more “pressure on bankers to be less hostile” to companies such as Facebook. “I don’t know when Facebook goes public, but I think this will happen with future offerings.”
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