Updated: Rich investors will make a killing from LinkedIn IPO - Will there be anything left for the public?

Summary:Wealthy investors have been trading LinkedIn shares for many months prior to the IPO of the business social network. Now they stand to make a huge profit over a short period of time...

Private investors in LinkedIn, the social network for business professionals, stand to make a hefty 46% profit in just two months, following the company's IPO this week.

The underwriters for LinkedIn increased the initial price by 30 percent, which would value the company at more than $4 billion. But if they price the deal too high it could dampen the crucial first day pop in share price and affect other IPOs.
###

Clare Baldwin and Alina Selyukh at Reuters, reported:

LinkedIn now plans to sell shares at $42 to $45 each, up from a previous range of $32 to $35. At the middle of that range, the nine-year-old company would be valued at $4.11 billion, or about $40.30 per registered user...

LinkedIn's growth has been rapid: It doubled its revenue last year to $243.1 million and posted net income for common shareholders of $3.4 million.

Small numbers of private investors have already been trading LinkedIn shares in secondary markets such as SharesPost. The most recent trades in March, gave the company a valuation of $2.8 billion.

When LinkedIn completes its IPO at a $4.1 billion valuation, it will produce an instant paper profit of at least 46%, over a two month period for private investors. Earlier investors will make even more money.

However, the founders of LinkedIn and other insiders will have to wait at least six months until they can start trading their shares -- that follows a seven year period when the company was private.

Private investors trading in secondary markets are only required to hold their shares for one year. They can get a greater rate of return in a far shorter time on their money than the entrepreneurs and VCs in the private companies.

But only wealthy individuals are allowed to trade in secondary markets, which have become a private stock market where the public is barred by the SEC.

Government regulations seek to protect an uneducated public being duped by savvy traders. Wealthy investors are considered by the SEC to be better able to understand risky investments and need no protection or constraint.

The success of the LinkedIn IPO will be an important signal for the Fab Four hottest private companies: Facebook, Zynga, Groupon, and Twitter. However, it remains to be seen if LinkedIn will be able to maintain a price above its IPO for the next few months.

- If the underwriters price LinkedIn too high --and they have raised the price significantly just a day before launch -- they won't leave enough upside to attract the retail investors, the general public.

- If LinkedIn doesn't pop significantly on day one, and then maintain a higher-than-IPO price for the next six months, the remaining Fab Four private companies will have to rethink their pricing strategies.

- But if the underwriters price the LinkedIn deal too low, they leave money on the table that's lost to the private investors.


Clearly, the current pricing is set to greatly reward the private investors in LinkedIn. Will there be anything of an upside left for the public investors?

- - -

Please see: Secondary Markets: Much Needed Liquidity For Silicon Valley Startups Or A Private Stock Market For The Rich?


Topics: Social Enterprise, Banking, Legal

About

In May 2004, Tom Foremski became the first journalist to leave a major newspaper, the Financial Times, to make a living as a full-time journalist blogger. He writes the popular news blog Silicon Valley Watcher--reporting on the business of Silicon Valley.Tom arrived in San Francisco in 1984, and has covered US technology markets for leadi... Full Bio

zdnet_core.socialButton.googleLabel Contact Disclosure

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Related Stories

The best of ZDNet, delivered

You have been successfully signed up. To sign up for more newsletters or to manage your account, visit the Newsletter Subscription Center.
Subscription failed.