Primitive Underwriting for Web 2.0 Deals

LinkedIn (LNKD) should’ve Gone Dutch with their IPO.  Forget every other piece of nonsense you’ve read this weekend and pay attention…

The firestorm about LinkedIn’s IPO rages unchecked as New York Times columnist Joe Nocera does an uncharacteristically bad post about whether Morgan Stanley “scammed” their client by pricing the stock offering too low.

The whole premise is absurd.  The day before the offering everyone was criticizing the valuation as being too high!

In the meanwhile, my friend The Epicurean Dealmaker has a take that I wholly agree with.  LinkedIn did not leave billions on the table, Morgan Stanley did not steal the capital they should have been raising for the company in the form of an opening pop.  Why do we know that this the case?  TED reminds us in his oh-so subtle way:


It don’t get more simple than that.

But what’s surprising to me is that these social media companies aren’t doing their initial public offering using the Dutch Auction method.  It’s a really simple way to make pricing democratic and demand-based – everyone who wants in gets to have a bit more impact on what the price will be.

The below explanation comes from a Forbes article from May of 2004 (written by my buddy Ari Weinberg), just as the Google IPO was starting to come together:

In a Dutch auction, a company reveals the maximum amount of shares being sold and sometimes a potential price for those shares. Investors then state the number of shares they want and at what price. Once a minimum clearing price is determined, investors who bid at least that price are awarded shares…

This method of IPO allocation can create an instant windfall for insiders by encapsulating as much market demand into the offering price as possible. And for young and growing companies, an auction allows the company to raise as much cash as the market is willing to afford it. But if the initial market demand is not there, a company putting its faith in the auction could miss out on the support of a traditional offering.

You cannot possibly tell me that this arrangement wouldn’t have worked out for all involved in the LinkedIn scenario, can you?

Google pioneered this type of IPO for tech stocks way back in 2004.  In fact, their lead underwriter was also Morgan Stanley!

I’m surprised the new Silicon Valley guys aren’t picking this method up for themselves as opposed to the more primitive pricing voodoo the bankers are doing now.  Dutch auctions aren’t perfect, but when floats are tight and demand is off the hook, they can bring a bit more realism to the offering price process before the open of trading.

Here’s an ancient but helpful New York Times infograph explaining Google’s dutch auction IPO, also from 2004:

After reading what everyone has had to say on this subject, from Blodget to Cramer to the dentists and lawyers at the dinner table last night, I can’t think of a better solution than to have done this deal Dutch Auction-style.  Everyone could have been satisfied that the price set was as close to “the right one” as possible.

We’ll see if they get some religion before the Groupon madness begins.  Given that the very nature of these companies is social, why shouldn’t the process by which they sell shares be a social exercise as well?


Was LinkedIn Scammed?  (NYT)

Jane, You Ignorant Slut (The Epicurean Dealmaker)

IPO Dutch Auctions Vs. Traditional Allocation (Forbes)


Tags: , ,

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. bitcoin loophole reviews 2020 commented on Sep 23

    … [Trackback]

    […] Info to that Topic: […]

  2. immediate edge review commented on Sep 25

    … [Trackback]

    […] There you can find 38601 more Information on that Topic: […]

  3. automated bitcoin investing commented on Sep 30

    … [Trackback]

    […] Info on that Topic: […]

  4. commented on Oct 03

    … [Trackback]

    […] Info to that Topic: […]

  5. buy ruger handguns online commented on Dec 02

    … [Trackback]

    […] Find More on to that Topic: […]

  6. 안전놀이터 commented on Dec 24

    … [Trackback]

    […] Find More Info here on that Topic: […]

  7. bmo mastercard online commented on Jan 10

    … [Trackback]

    […] Information to that Topic: […]

  8. AEG A83400HLW0 manuals commented on Jan 19

    … [Trackback]

    […] Read More on that Topic: […]

  9. Silvercrest SWW 1500 A1 manuals commented on Jan 22

    … [Trackback]

    […] Read More on that Topic: […]