LinkedIn’s initial public offering has so far lived up to the hype, pricing at $45 a share and raising $351m.
The pricing values the business focused networking website at $4.25bn, a jump of nearly one-third over the course of the week, as its offering price was revised higher to reflect surging demand among investors seeking to add exposure to the burgeoning social networking space to their portfolios.
The vast majority of the offering went to large institutions, according to people close to the deal.
LinkedIn’s valuation, which is 17 times last year’s sales of $243m, is well above that of members of the Nasdaq Composite index, where the average price ratio is just 4.3 times annual sales.
The valuations are prompting fears of a bubble, much like that of the late 1990s. But they also reflect high hopes for social networking groups, which many investors believe will disrupt existing business models in media and the web, much as Apple did for the music and personal computer businesses.
Renren, one of China’s largest social networks, went public this month and is valued at 70 times last year’s sales.
Facebook, which is in the early stages of pursuing a public listing, was valued in private markets at 32 times last year’s estimated sales as of the end of March, according to Nyppex, a network for trading shares of private groups.
“We just don’t know enough about this industry to know which metric, whether it’s clicks or eyeballs or something new, is the correct one,” said a US investment banker.
LinkedIn’s pricing will be tested as the shares begin trading on Thursday on the New York Stock Exchange. It will probably experience heavy volume as some investors seek to make a quick profit.
A worry is that it could repeat the performance of Renren, which priced at the top of its range at $14 and surged in first-day trading to $24, but has since slipped to $13.70. “If you track LinkedIn shares, their ownership will probably turn over at least once or twice over the first few days,” said Mona DeFrawi, founder of Equidity, which markets IPOs to long-term investors.
As expected, 7.8m LinkedIn shares were sold, the bulk by the company. The three largest venture capital investors sold none. Goldman Sachs, which sold its entire stake, made $39m. The underwriters can exercise an overallotment that would bring the total share sale to 9m. The success of the offering might give pole position for other social networking IPOs to the underwriters: Morgan Stanley, Bank of America Merrill Lynch and JPMorgan.
Reid Hoffman, the group’s chairman and co-founder, has a 20 per cent stake now worth $850m. Mr Hoffman and the pre-IPO investors will retain control through Class B shares, that have ten times the voting power.