LinkedIn’s (NYSE:LNKD) underwriters, including Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC), are splitting between them a $30 million IPO fee. The question is whether they deserve such substantial fees given that LinkedIn initially sold its stocks too cheaply based on these underwriters’ advice. (Check Out “LinkedIn Stock: Which Shareholders are the Idiots?“)
The same stock that traded at $80 a share Thursday morning, was sold to BOFA, Morgan Stanley and other’s best institutional clients for $45 a piece the previous night. These institutional investors enjoyed an immediate 90% gain, representing a $175 million loss for LinkedIn—funding they could otherwise have used.
While underwriters should underprice deals in order to reward institutions for taking a risk on companies new to the market, a discount of 10-15% is generally considered sufficient. In the case of LinkedIn, however, the discount was closer to 50%, leaving institutional investors thrilled the following morning. Should underwriters be further compensated for flagrantly serving the interests of their biggest investors and consequently their own?
To be fair, underwriters did a great job marketing the company, contributing significantly to the elevated demand. LinkedIn execs certainly seemed pleased with their results. A big first day sets a powerful precedent moving forward, making it easier for LinkedIn to raise money in the future. However, for BOFA, Morgan and the rest, this success helps distract LinkedIn’s leadership from the fact their underwriters might be costing them more than just the IPO fee.
Here are the world’s biggest investment banks that may come under scrutiny: Bank of America Merrill Lynch (NYSE:BAC), Barclays (NYSE:BCS),Citi (NYSE:C), Credit Suisse (NYSE:CS), Deutsche Bank(NYSE:DB), Goldman Sachs (NYSE:GS), JP Morgan(NYSE:JPM), Morgan Stanley (NYSE:MS), Royal Bank of Scotland (NYSE:RBS), and UBS (NYSE:UBS).
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