LinkedIn vs. Facebook IPO Success

LinkedIn vs. Facebook IPO Success

 

LinkedIn’s recent IPO performance appears to have crushed the perception of big named company IPOs from Facebook, Yelp, Zynga, Groupon and Pandora. Based on their recent closing price, LinkedIn is up 141%. According to BusinessInsider Linkedin is, “the best-performing IPO this year by a huge margin. The next closest competitor, Bankrate, is up about 28 percent from its initial public offering.”

Timing may have been a factor for LinkedIn’s success. They have also seen consistent growth in unique visitors. Investors waiting for highly anticipated IPOs like Facebook may have helped increase the success of LinkedIn as well.

Although Facebook has had a lot of negative press regarding its IPO, CBS news reported that Facebook’s IPO was actually a success. CBS explained, “LinkedIn (LNKD) shares popped from the start in the professional networking company’s 2011 IPO and more than doubled in the first few days.”  Investment bankers made a bundle. This led people to think Facebook had been a flop. However, CBS author Allan Roth explained, “my definition of a successful launch of a new publicly traded stock doesn’t rest on how much money the investment bankers make. It rests on how close the offering price is to where the stock actually trades. The fact that Facebook shares closed at nearly their offering price tells me that that investors thought it was fairly priced. That’s pretty amazing, in my view, given all the hype over Facebook.”

Colin Lokey from SeekingAlpha explained that when comparing Facebook to Linkedin, fundamentals show that Linkedin is overvalued. Lokey warned, “Investors should of course, keep in mind that the fact that LinkedIn is far too expensive doesn’t mean Facebook is fairly valued at half of LinkedIn’s price.”  Prices have been affected by the recent Facebook IPO. Yahoo’s Finance writer Jeff Macke did not share Lokey’s opinion on pricing when he stated, “Linkedin stock has been dragged down over the last few weeks by the undercurrent of the Facebook Titanic.” He sees LinkedIn as a “screaming buy”.

Only time will tell how well LinkedIn and Facebook will perform. BizJournals recently quoted Linkedin’s CFO Steve Sordello about the importance of a company’s IPO results. “”An IPO is a one-time event, and what really matters is the long term. If it rains on your wedding day, you’re going to remember it rained but it’s not going to influence the marriage.”

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What to Know before Investing in IPOs like LinkedIn or Pandora

Is investing in an initial public offering (IPO) a good idea?  With the recent LinkedIn and Pandora IPOs and talk of future IPOs with Twitter and Facebook, this is a question that many investors may be considering.  Imagine getting in on the ground floor of a giant like Coca-Cola? It might have been a wild ride, but those that hung in there, had a nice payoff.  Joshua Kennon of About.com reported, “A single share of Coca-Cola purchased for $40 at the IPO in 1919, for example, crashed to $19 the following year. Yet, today, that one share, with dividends reinvested, is worth over $5 million.”

Kennon suggests that if you have the stomach for risking your investment, you might want to consider whether the company can grow at a rate high enough to justify its price, whether there are any patents or trademarks to protect the business, whether you’d want to hold onto this stock for 30 years and if it fell by 50% would you have the stomach to handle it?

DailyFinance reported some additional questions to ask before investing in an IPO: (1) Is there an attractive market for the product? (2) Does the company have a significant share of the market? (3) Is the company’s management team experienced? (4) Is the company growing and profitable?

The following list shows some more recent IPO original offering prices compared to their current price (as of July, 2011):

Google Initial Offering Price, 2004:  $85/share

Google Price July, 2011:  $530/share

Pandora Initial Offering Price, June, 2011:  $16/share

Pandora Price July, 2011:  $19/share

LinkedIn Initial Offering Price, May, 2011: $45/share

LinkedIn Price July, 2011:  $98/share

Many employees of companies like Google became wealthy overnight when their companies went IPO. The New York Times article Google’s IPO 5 Years Later stated, “When the offering finally happened, it turned an estimated 1,000 Google employees into millionaires, at least on paper. Since then, many more millionaires have been minted inside the Googleplex, the Web search company’s headquarters in Mountain View, Calif.”

Not all startups have been this successful.  Businesspundit lists the 25 Internet Startups that Bombed Miserably. MSMoney also warned, “Many investors fret they’ll miss the next big thing because they have no access to the IPO market, but study after study has proven that IPOs historically underperform the broader markets.” FIGuide echoed that same sentiment in their article Should You Invest in IPOs, stating that there might be better options.  “A seminal paper published in The Journal of Finance looked at IPOs from 1970 to 1990. During the five years after issuance, investors in these IPOs got average annual returns of only 5%.(1) By contrast, the overall stock market’s average annual return from 1970 to 1990 was more than double that figure, at 10.8%. To put this in perspective, $1,000 invested at 5% for 20 years would have generated $2,653, while $1,000 invested at 10.8% would have generated $7,777, almost three times as much.”

Top 5 Things to Know to be a Successful Entrepreneur

The typical entrepreneurial personality has the drive and ambition for success.  Like anything in life, though, it is always harder to do something the very first time.  This can discourage many new entrepreneurs from taking that initial leap and to start their own business. 

I teach several entrepreneurial courses and have put together some important articles that I recommend to my students.  The following list contains many of these articles and some of the most important things that entrepreneurs should do in order to be successful:

  1. Read Success Stories and Attend Lectures:  An excellent way to be inspired and learn from other entrepreneurs is to read their success stories.  Onlineuniversities.com recently came up with a list of 20 Biographies Every Serious Entrepreneur Should Read.  These books include important success stories from Ben Franklin to Sam Walton.  Another very important article to read is:  50 Excellent Lectures for Small Business Owners.
  2. Learn the Truth About Failure:  Many entrepreneurs are stalled in their pursuit of success due to their fear of failure.  Even some of the most famous entrepreneurs met with failure before success.  To find out more about this, check out:  50 Famous People Who Failed Before Becoming Successful. Also see:  Famous Business Failures: Is it as Gloomy as it Sounds? Also see:  10 Famous Product Failures and the Advertisements That Did Not Sell Them.
  3. Learn the Truth About Finances Required:  Not all entrepreneurs come from wealthy families.  It can be challenging to come up with the funds required to begin a business.  Find out how some very famous entrepreneurs became successful in the article:  Famous Entrepreneurs Who Hit it Big With Humble Beginnings.
  4. Learn How Women Have Become Successful Entrepreneurs:  Some very successful entrepreneurs have been women.  Check out:  Most Inspiring Entrepreneurial Women.
  5. Learn How to Network:  One of the best ways to get a product or company known is through social media.  Part of an entrepreneur’s success is through finding their customers and their niche.  Check out:  5 Top Networking Tips for Small Businesses.

Once an entrepreneur has developed a strong idea of the direction they want to take, they need to work on their feasibility study.  Investors will want to see this to be sure that their idea is sound. Another important aspect of creating their new business is deciding on a vision and mission statement.  Check out The Top 10 Mission Statements in 2011. Once an entrepreneur has received enough funds to get their new business off the ground, they may want to consider whether or not to go IPO.  Many companies like Facebook have waited and not gone this traditional route.  Find out Why Companies Are Not Going IPO due to fear of the past dot com crash.

LinkedIn IPO May Be Sooner Than You Think

LinkedIn has already completed the first step in the IPO process.  With over 90 million members in over 200 countries and an estimated worth of $2 billion, its growth is undeniable. All Things Digital reported, “LinkedIn, the online business networking site, is likely to file regulatory documents for an initial public offering as early as today, according to sources close to the situation.”

Linkedin may not be the only big name going IPO soon.  According to All Things Digital, “LinkedIn’s entry into the public market is one that many expect will be followed by other Internet firms in the coming year, including Zynga, Chegg and, most anticipated of all, Facebook.”

Why Companies Are Not Going IPO: Are Skype, Twitter and Facebook Projected IPOs in 2011?

There is a new trend for companies to remain privately owned.  Why have mega-companies like Facebook yet to go public?  The New York Times reported recently, “An I.P.O. used to be a rite of passage for a company, a sign that it had arrived. But even before the financial collapse of 2008, some entrepreneurs and financiers worried that America’s markets were somehow losing their edge. That would be bad news not only for Wall Street but ultimately the entire economy.”

Investors are frightened due to the recent stock crash.  Will the economy suffer if there isn’t an infusion of new companies in the stock market?  The numbers are definitely down.  According to The New York Times, “The annual rate of I.P.O.’s peaked in 1996, when around 756 American-based companies went public, according to Dealogic. That figure fell to a low of 36 during the financial crisis in 2008. It picked up to about 50 in 2009 and, so far this year (2010), it is running at about 100, excluding G.M.”

There has been talk that IPOs will pick up in 2011.  There are some major companies that have hinted at going public in 2011.  Here is the latest on some of the most discussed possible entrants into the IPO market:

  • SkypeTMC News reported, “Skype originally filed an S-1 registration statement with the Securities and Exchange Commission back in August, but have made several major moves since that may have pushed back the company’s timetable.”
  • Facebook – Although it is possible they could go IPO in 2011, recent talk has indicated it will probably not happen until 2012.  ComputerWeekly stated, “Facebook is preparing to sell stock through an initial public offering (IPO) in 2012, according to a document published by the social networking company. The document revealed that the number of Facebook shareholders will increase above 500 this year, forcing the company to go public or disclose financial information.”
  • Twitter – Some have speculated Twitter would be going public but ReadWriteWeb reported differently.  “According to CEO Costolo, Twitter has grown quickly recently, with 100 people joining the company in Q4. While the company recently raised $200 million in funding, Swisher wondered what Costolo saw as the company’s future – would it sell or would it go public? Neither, said Costolo.”

Companies go public to get money.  There are other advantages.  According to Investopedia.com, other reasons to go public include:

  • Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
  • As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
  • Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

There are some disadvantages to going public.  According to Findlaw those disadvantages include the following.  I recommend going to Findlaw’s link to read the full explanations behind each of these disadvantages:

  • Time and Expense 
  • Disclosure
  • Decisions Based on Stock Price
  • Regulatory Review
  • Falling Stock Price
  • Vulnerability