May 18, 2011

LinkedIn Ups Share Price Before IPO

Business-oriented social networking site LinkedIn said an initial public offering (IPO) will likely raise 30 percent more than previously expected, a positive sign that investors are eager to bet on social networks.

LinkedIn, which plans to set the IPO price Wednesday night and begin trading on the NYSE under the symbol LNKD on Thursday, had originally planned to sell 7.84 million shares at $32 to $35 each. But in an updated filing with the Securities and Exchange Commission (SEC) on Tuesday, the company increased the shares to $42 to $45 apiece.

At the new IPO share price, nine-year-old LinkedIn would be valued at an estimated $4.11 billion, or about $40.30 per registered user.

While most companies often raise their price ranges by $3 or $4, a $10 increase is rare. The last time a price range was increased by more than $10, was in 2000, when Internet network equipment company ArrowPoint Communications raised its price range by $15 per share, according to Dealogic -- an investment banking firm.

When LinkedIn goes public on Thursday with a value of at least $4 billion, it will be the biggest IPO stock offering by a US Internet company since Google went public in 2004, according to research firm Renaissance Capital.

Though there have been some miscalculations in recent weeks in the US markets, with some IPOs pricing well only to trade lower in their debuts, analysts are confident that investment bankers would accurately gauge demand for LinkedIn.

"The underwriters have to be absolutely sure they have the price right. There is no way they would risk blowing up this deal when they very well could be chosen for Twitter, Groupon, Zynga or Facebook's down the road," Scott Sweet, managing director of research firm IPOboutique.com, told the Wall Street Journal.

Sweet doesn't expect LinkedIn to deliver the best first-day "pop" of the year -- a title currently held by Qihoo 360 Technology Co. Ltd., which rose 134.5 percent on its first day of trading back in March.

"I like the deal and think it will go up, but I wouldn't think that on the first day we would see it double," said Sweet. "But I do know that investors are getting very low allocations, and most as usual is going to the biggest and best institutions, who are obviously saying they are willing to pay as much as $43 to $45."

Even at the company's lowest share price range of $42, LinkedIn's valuation would be 258 times last year's earnings of $15.4 million.

The reception to LinkedIn's IPO will be an important gauge of investor appetite for social networking as a whole. It will set the stage for other social networking IPOs in the coming years, including Facebook, Twitter, Groupon and Zynga.

LinkedIn disclosed that it does not expect to be profitable in 2011 based on US generally accepted accounting principles. "Our philosophy is to continue to invest for future growth, and as a result we do not expect to be profitable on a GAAP basis in 2011," said the filing.

Still, the IPO is expected to raise about $200 million for LinkedIn and produce $125 million to $135 million for existing stockholders, who plan to sell some of their shares. The biggest winner will be LinkedIn's cofounder and chairman, Reid Hoffman, whose 20 percent stake in the company is expected to be worth more than $800 million.

Eric Jackson, managing member at the hedge fund Ironfire Capital, said he would not "touch the stock" at $45. "Maybe at $25," he said.

While there is a lot going for LinkedIn including its built-in professional audience, the biggest problem is its profitability. "LinkedIn has its niche and Facebook has its niche. Facebook's is much bigger and much more profitable," Jackson told Reuters.

It's not uncommon for an unprofitable company to seek an IPO, but it could give investors pause to see a company candidly predict swinging to a loss during its first year going public.

"If LinkedIn goes out and doesn't trade well that could present a problem marketing other social media companies going forward," DLA Piper's Yvan-Claude Pierre told Reuters.

Companies like Facebook and Groupon have stoked investor interest in social media companies and command multibillion-dollar private market valuations. But there are signs that investor appetite could be waning.

Chinese social networking site Renren went public in the US earlier this month. It shares soared 29 percent in their debut but have since dropped below the IPO price.

French social networking site Viadeo, the second-biggest social networking site for professionals behind LinkedIn, said on Monday it would defer plans to go public.

"LinkedIn will be used very heavily as a modeling tool for other companies in this space," David Menlow, founder of research firm IPO Financial, predicted. "The pricing is going to have a dramatic effect. This is just the starting point for valuation adjustments," Menlow told the Associated Press (AP)

Facebook, the most prized of social networking companies, is still awaiting an IPO. It was valued at $50 billion in January. Goldman Sachs Group Inc., which holds large investment in Facebook, is also a major shareholder in LinkedIn. If Goldman Sachs follows through on its plan to sell its entire LinkedIn stake in the IPO, the firm would receive around $38 million at the mid-point of the price range.

LinkedIn, though not nearly as popular as Facebook, has emerged as a widely used directory for the professional world. In March, it had 102 million members and is adding another million each week.

LinkedIn gets about two-thirds of its revenue from fees it charges for greater access to the website and more data about the expertise listed on each member's page. Businesses often used LinkedIn to recruit people who might not even be looking for a job at the time. LinkedIn also has made money from business surveys of its members and a service that offer career advice to college graduates.

The rest of the company's revenue comes from Internet ads, which serve as the financial backbone for Google, Facebook and many other Internet sites.

Last year, LinkedIn earned $3.4 million on revenue of $243 million. Its growth accelerated during the first three months of 2011, putting it on a pace to generate $500 million in revenue this year. However, management has warned that the company might lose money this year as it invests in more products and more computers to run its website as it tries to ward off threats from competitors overseas.

LinkedIn's top venture investors include Sequoia Capital, which will own 17.8 percent after the IPO; Greylock Partners, which will own 14.9 percent; Bessemer Venture Partners, with 4.8 percent; and Bain Capital Ventures, which is the only one of these firms selling shares in offering, leaving it with 3.9 percent.

The company's IPO is being managed by Morgan Stanley, Bank of American Merrill Lynch and J.P. Morgan Chase & Co.


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