Alison Hyde (pictured), technology fund manager at Cavendish Asset Management, assesses the impact and implications of LinkedIn’s successful IPO. The social networking site aimed at professionals and the business community, which became the first major company from the much-vaunted social media sector to go public when it began trading on the New York Stock Exchange this week, raised USD352.8m after upping the expected price range by 30 per cent from USD32-35 to USD42-45 a share and selling 7.84m shares. This gives the company a high market valuation of USD4.25bn, over 200 times its earnings for the last year.
The runaway success of LinkedIn’s market debut is testament not so much to the company itself, but rather the sheer levels of investor excitement surrounding the burgeoning social media sector. It demonstrates a healthy appetite for shares in social network businesses, and in many ways is serving as a trial run for the big one – Facebook. Speculation as to when the current crop of big names in social networking – Facebook, Twitter, Groupon, and Zynga – will go to market has been building to boiling point, and LinkedIn’s flotation has reaped the rewards of this general pressure on the sector. We may be witnessing the opening of the floodgates, the beginning of a bumper season of social media IPOs; the others can only continue to raise money via the secondary markets for so long.
The lofty valuations we are seeing have led to inevitable talk of a new bubble, and even comparisons to the frenzy preceding the dot com bust of the new millennium. The parallels however, are flawed: the dot com bubble saw outrageously high valuations for IPOs of companies that were barely more than a plan on paper. LinkedIn is an example of the relative maturity of the sector compared to the bad old days; it has been operating for years, pruning its business model, building its network, and now has proven profitability. Investors are far savvier when it comes to the web these days, as are we all. Nonetheless, it is understandable that the size of some of these valuations would raise concerns.
One less positive aspect of the LinkedIn IPO, however, concerns the dual stock structure, whereby the original owners retain a level of company control disproportionate to material ownership, and at the expense of their new shareholders. Yet the example of Google shows that this approach may yield benefits for all in that the original visionaries behind the company are able to maintain the direction and culture of the company – which in Google’s case is central to its success – unhindered.”
