November 16, 2011 1:21 am

Late-stage investors sell LinkedIn stakes

LinkedIn and its stockholders are set this week to sell 8m more shares, worth some $600m, with private equity firm Bain Capital selling down its entire stake in the social networking group.

Investors have been bracing for a flood of secondary offerings of shares in internet companies such as LinkedIn, Pandora Media and Groupon, which generated excitement by offering only limited numbers of their shares initially.

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Shares in LinkedIn are trading more than 30 per cent above their $45 IPO price but have fallen 10 per cent since earlier this month when it announced its secondary offering, which is larger than its initial 7.84m share sale.

“It highlights the risks of the low-float IPO. Once they are trading, these companies have limited upside as it becomes less expensive for investors to short the stock,” said Josef Schuster, president of IPOX Schuster.

LinkedIn shares closed at $74.86 on Tuesday, valuing the company at $7.2bn. The secondary offering is expected to price on Wednesday after the market close, a few days ahead of the expiry of the 180-day share lock-up period after its IPO.

A number of LinkedIn shareholders, including top executives, are selling 10 per cent of their remaining stakes in the secondary.

This group includes Jeffrey Weiner, the chief executive who sold a small stake in the IPO, and venture capital firms Greylock Partners and Bessemer Venture Partners, which sold no shares in the IPO.

The two largest shareholders, founder Reid Hoffman and Sequoia Capital, the earliest venture capital investor, are not selling any of their stakes of 23 and 21 per cent respectively. Sequoia had paid $4.7m for its stake, now worth some $1.5bn.

In general, the earliest investors are holding on to their investments while later-stage VC investors such as Bain, which led a $53m fundraising round in 2008, have been cashing out.

Bain held a 4.8 per cent stake before the IPO, when it also sold a portion of its shares. Bain Capital declined to comment.

Another 2008 investor, SAP Ventures, is also selling 33 per cent of its small stake in the secondary offering. Goldman Sachs and McGraw-Hill, which invested in a separate $22.7m round in 2008, sold down their entire stakes in the IPO; both stakes were less than 1 per cent of the company.

Like its social networking peer Groupon, which went public earlier this month, LinkedIn sold fewer than 10 per cent of its shares in its IPO in May, less than half the average of a typical technology company offering.

As a result, the shares have been difficult to short, even though many analysts argue that the company is richly valued at about 30 times last year’s sales.

The secondary sale may make it easier to bet against LinkedIn stock. According to Data Explorers, more than 90 per cent of shares available to borrow are currently on loan to short sellers, who sell the shares and hope to buy them back later at a lower price.

The TIM Group, which tracks brokerage recommendations, said that a growing number of desks were advising their clients to short LinkedIn, with two short recommendations for every long for the opening of trading on Wednesday.

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