LinkedIn went public yesterday, priced at $45 a share.  They never traded lower than $80, and traded as high as $122.69 before closing at $94.25.  Friday morning, shares opened at $101.99.  CNBC.com's John Carney surely isn't the only one to accuse the underwriters of "hustling" their clients.

He notes that with shares rising to more than 100% of its IPO price, this means that the favorite clients of Morgan Stanley, Bank of America Merrill Lynch, and JPMorgan Chase - LinkedIn’s underwriters - are making a fortune.  They got in at $45 a share and at least doubled their money instantly.  "It also means that LinkedIn’s owners and investors just got swindled."

    Reliance on Wall Street Bankers.   LinkedIn relied on its Wall Street bankers to fairly price the initial public offering.  JPMorgan , BofA, M. Stanley advised that the stock come to market at $45 a share - which would raise nearly $353 million, minus fees to lawyers and investment bankers.  Yet, everyone knew the shares would rise on the open.  That happens with hot companies and, in effect, represents an additional underwriting fee for companies going public. 

"It’s just the vig - the rather negative term used to describe an amount charged by a bookmaker - they have to pay to do business with Wall Street."

But a 100% rise is evidence that LinkedIn’s shares were wildly, almost fraudulently, underpriced, according to Mr. Carney - who added that the bankers either had no clue about the price people are willing to pay for the shares, or they decided to grant their best institutional investment customers a bonanza at the expense of LinkedIn.  In either case, LinkedIn gave up $350 million for this mispricing.

    Simply analogy from Mr. Carney's old boss, Henry Blodget.   This is akin to your trusted real estate agent persuading you to sell your home to her best client for $1,000,000.  This is the best price she can get you, the agent says.  But the very next morning, the person who bought your house immediately turns around and sold it for $2,000,000.  And, of course, the very same agent helps her sell the house. 

Would you suspect that the agent was really working for the guy who flipped your house for a 100 percent gain?  Of course you would.   [CNBC.com, 5/19/11]