... and remember guys, the stock price is just what the public is willing to pay for it, and is not directly bound by any fundamentals. It's not LinkedIn's fault that their stock is overvalued.

You may say it's not their fault, but if you log in to LinkedIn today you'll notice that all of the "news" articles - now placed in an even more prominent position than normal - are about how underpriced their stock is. Entirely coincidentally, I'm sure.

The price is set based on market analysis. That's what the company thought they could get for it. The transaction requires willing participants.

Think about the market price of houses before the crash, each buyer and the seller were willing to make transaction. We all know the result. Fundamentals are important as well as prospect of the company. So we should talk about what is that prospect that can make company's current market valuation rational.

True, though it may be that some participants are simply willing to buy the stock with the expectation that they can sell it quickly, for more than they bought it for.

How much of that goes to crystal trophies and high-fiving brokers that made the deal happen?

7% of the total IPO issuance goes to the bankers. This number is consistent across the street. Once upon a time, anti-collusion investigations were threatened because there was no explanation for why every major bank charges exactly 7%

I've often thought that there is no need for collusion if you can exchange minimal information over public, legal channels and know how to work a strategy that assumes a modified prisoners dilemma. You can often see oil prices or airline tickets operating that way. E.g when one airline raises prices, then sees that no-one is following the rise, after which the price comes back down. Or everyone else is ready to raise prices and ticket prices go up.

Yup; if judges presiding over anti-trust suits had read Thomas Schelling's book The Strategy of Conflict, there would be many more broken-up oligopolies than there are now.

They get a chunk of the other 300m.

Actually it looks like more a chunk:

"By underpricing the stock, Morgan and BOFA gave their best institutional clients a gift of at least $175 million"

http://www.businessinsider.com/linked-in-ipo-2011-5-b

A recurring chunk, you mean. =)

They left a lot of money on the table.

This forbes blog suggests an auction would have been fairer, and I strongly agree. Institutional investors who got in on the IPO are just printing money, whereas a google-style auction would have given more of that money to the owners.

http://blogs.forbes.com/greatspeculations/2011/05/19/linkedi...

Not necessarily, since the $45 price was at the top of the range and the issue had already been repriced. We won't know whether the $45 price was optimal or not for a while -- it may seem expensive in 90 days when the price settles down.

But if the public is buying the stock at the $80 range minutes after it opens, isn't that enough to say that the initial offer was lower than what it could be? I don't think you need to know what price the stock is trading at three months from now in order to judge the initial sale value.

That really doesn't make any sense. As anyone who knows the stock market will tell you, if you can guess the price of a stock before the market opens, you'd be a wealthy man. But underwriters are conservative with initial IPO pricings because 1) they have no real idea where a stock will go once it's public and 2) they want the stock to go up after it opens (IPOs that don't do this are said to be "broken" and sometimes never recover).

If LinkedIn wants to capture some of the value from the multiple they're seeing today, they can simply sell (or issue) more stock. Doubling or tripling your IPO price is not a tragedy by anyone's standards.

Those are good points, and I'm not arguing that they left a lot of money on the table or didn't, but what I am disputing is where you said "We won't know whether the $45 price was optimal or not for a while --it may seem expensive in 90 days when the price settles down."

Why does the price 90 days from now matter to the judgement of whether or not the initial sale - today's sale only - was a success? If the price drops below the initial sale value, then $45 today will definitely seem expensive to people buying it 90 days from now. But I don't see where it would mean that the company made a mistake in the initial offer of $45/share - in fact, wouldn't it look like the company got a good deal, in selling the initial shares at above-market-values (in 90 days from now)?

The reason is because (in the absence of clairvoyance) the performance of stocks is evaluated over time. If the price is closer to $45 in a month or two, it'll be easier to say that today's price jump was an aberration. If the price is $180 in three months, it'll be possible to say that today's price is actually too low.

But we aren't discussing the long-term performance of the stock here - we are discussing the wide range between what their initial offer is, and the amount the IPO underwriters got to take home.

Not even wrong.

Forget all the junk you think you know about markets. A stock is something you buy. How many things have you bought that doubled in resale price the day you bought it? I'll bet it's a vanishingly small number.

From a producers point of view such a situation means you underestimated demand for your product, which means you didn't do enough research.

In line with the common stupidity of IPOs, LinkedIn trusted a conflicted party to do that research for it.

LinkedIn paid a fear tax. Fear that if they tried to buck the statu-quo like Google they wouldn't come out as well, fear that if they tried something shockingly new like selling stocks directly to individuals who want them they would fail.*

I don't mind when people note the standard way things are done, but for the love of Bob don't pretend the way the stock market works today is fundamental, immutable, or even close to Good.

* Speed argument on this point: Illegal! -> Benefits from that? -> Ignorant investors protected! -> Uh huh, other externalities? -> Large investors make millions! -> We're done here.

You're assuming that there are enough buyers at $80 to take 100% of the offered stock.

Good point, although the original point still stands: $352.8 million on last year's $15 million. Of course, stock price is a prediction of the future, not necessarily a comment on the past.