Are Investment Banks Intentionally Underpricing IPOs?
According to a column by the New York Times’ Joe Nocera, LinkedIn (NYSE:LNKD) got scammed by investment bankers in its IPO. Nocera accuses lead bankers on the deal, Morgan Stanley (NYSE:MS) and Bank of America Merrill Lynch (NYSE:BAC), of intentionally pricing LinkedIn at a low-ball value of $45 per share.
Nocera argues that because the I-banks had access to reliable data and a good gauge of market demand for LinkedIn stock, they were able to set a low-end price for the IPO. Since bankers knew the $45 price level would ensure incredibly high demand for the stock, they could count on share prices to rise quickly over the course of the day and then use this informational advantage to “do favors [insider trading style]” for major accounts and personal corporate interests. (For more reaction to the LinkedIn IPO, be sure to check out this exclusive Wall Street Cheat Sheet feature.)
Does the success of LinkedIn’s (NYSE:LNKD) IPO reek of honest capitalism or market manipulation? According to a Facebook Post from Zynga (which also expects to make its IPO soon) General Manger Eric Tilenius, there was clearly some foul play at hand. Tilenius commented on recent IPO activity, saying “A huge opening-day pop is not a sign of a successful I.P.O., but rather a massively mispriced one. Bankers are rewarding their friends and themselves instead of doing their fiduciary duty to their clients.”
Henry Blodgett of Business Insider suspects that the banks were behind LinkedIn’s (NYSE:LNKD) skyrocketing share prices in its first few days of trading. He offered the following analogy, “Suppose, he wrote, your trusted real estate agent persuaded you to sell your house for $1 million. Then, the next day, the same agent sold the same house for the new owner for $2 million. How would you feel if your agent did that?”. That, he argues, is what Merrill Lynch and Morgan Stanley did to LinkedIn.
A statement from Investment Management Firm BlackRock, Inc. (NYSE:BLK) also weighed in on recent IPO activity, commenting, ” We are concerned that companies are appointing advisors based on indications of valuation that are unrealistic. …We are concerned about the structure of incentive fees which maximise your returns for the price achieved on the first day of trading rather than at some, more distant date, e.g., six months after float. Such fees do not represent an alignment of interests between us and seem to drive increasingly aggressive behaviour from syndicates.”
With BlackRock offering a different perspective on the issue, it is unclear who is culpable for the exploits of recent IPOs, and less clear whether or not such manipulation has been intentional. Perhaps a headier move would be to check our cynicism and let the markets do their work. LinkedIn (NYSE:LNKD), Yandex (NASDAQ:YNDX), and other successful recent IPOs have made a lot of people a lot of money. Unless these ticker prices take a steep turn towards the red, why start pointing fingers?