The phenomenal growth of social media and the billions of dollars of investor money being pumped into social networking sites has led to speculation of an imminent burst. A second dot-com crash, if you will. Having been through frenzied valuations followed by economy-busting falls just a decade ago, analysts are cautious.
But Wall Street and Silicon Valley aren’t so. Facebook’s value swelled to $50 billion after Goldman Sachs invested $450 million in the company and banks are said to be pitching as much as $15 billion to take Groupon public, the discount coupon site with a social element that rejected Google’s $60 million bid last December. Facebook, Groupon, Twitter and Zynga are all headed for an IPO in 2011 and 12.
But the mood in financial circles is somber. After speaking to analysts, CNBC.com concluded, “The glut of sales and initial public offerings (IPO) in the social media sector expected during this year could be indicative of a tech bubble similar to a decade ago.”
The companies are strutting on boldly nevertheless and throwing its hat first in the IPO ring, is LinkedIn, the social networking site for professionals.
LinkedIn was founded in the living room of one its five co-founders, Reid Hoffman, on May 5th 2003 and at the end of the month, it had about 4,500 members. A few months later, Sequoia Capital invested $4.7 million in the company. In March this year, the site had over 100 million members.
LinkedIn will trade on the NYSE under the ticker symbol LNKD. Earlier in the week of its IPO launch, the company priced its stock between $32 and $35 but raised it to $42-$45 just days after, increasing the money it hoped to raise from $274 million to $341 million.
The company hopes to use the money for marketing and expansion. LinkedIn gains a new member every second and at that rate it’ll need all the extra funds it can get to sustain growth. Unlike some of the dot com companies that barely had their revenue models in place, LinkedIn currently earns through premium subscribers, advertising and recruitment solutions. After seven years, it made profits, clocking in $161.4 million in the first three quarters of 2010.
But most observers view LinkedIn as the boring cousin of other Social Media sites. The financial and tech worlds are more excited about Groupon, Twitter and the big daddy of buzz, Facebook.
Speaking to the Wall Street Journal, Tom Taulli, author of “All About Short Selling” and “Investing in IPOs”, says, “This won’t give us the best indication how crazy people might go over some of these other deals.”
Although, the fact that LinkedIn is among the first social media companies to launch an IPO is enough to attract thousands of buyers who see tremendous potential in social media. Referring to the friendly rivalry, and the overlap of investors and employees that exists between Facebook and Linkedin, Maureen Farrell of Forbes says in an article aptly titled ‘Linkedin: IPO to get first mover advantage?’, “By going to the public markets ahead of Facebook, the professional networking site (LinkedIn) can take advantage of the implied valuation of its larger peer without getting directly sized up by investors.”
After talking about valuation figures of both the companies that has been mentioned before in this piece, Ms. Farrell says, “If Facebook goes public in 2012 as expected, LinkedIn would have almost a year to prove itself to the Street before withstanding direct comparisons to Facebook.”
The perceived rivalry between both the companies extends to the financial organisations they are dealing with, as Facebook has been working with Goldman Sachs and LinkedIn with rival Morgan Stanley for their respective IPOs.
One of the interesting debates about LinkedIn’s IPO is the governance structure it has chosen, that of the dual-class stock. Essentially, in a dual-class structure, the company heads will wield power that’s not commensurate with the percentage of the stocks they own. When it comes to Tech IPOs Google had set a precedent having fought hard to maintain this structure; reserving B Shares carrying 10 votes for Google insiders and A shares that get only one vote for outsiders.
In a scathing critique of LinkedIn’s decision to follow the same path, former corporate attorney and now professor and columnist, Steven M.Davidoff says in NYT’s Dealbook, “The Internet company (LinkedIn) is rushing headlong toward an initial public offering that could value the company at more than $3 billion. But while investors may be eagerly waiting to befriend it, LinkedIn is living up to a common criticism of social media — that online “friendship” doesn’t count for much.”
Davidoff goes on to explain that dual-stock structures vest too much power in the top management that may hold back the company’s growth. But he contradicts this very claim when he talks about how Google brought dual-class holdings back in vogue, “Dual-class stock was then virtually forgotten, until the Google I.P.O.” By no stretch of imagination, has Google’s growth been held back in anyway because of its structure.
Over the years, experts have debated for and against dual stock and it remains to be seen how LinkedIn will fare. Among the supporters of LinkedIn’s governance choice is CNBC’s senior editor John Carney, who says, “…dual class companies can better avoid the short term “beat the quarter” thinking that debilitates so much of corporate America.
“Perhaps freedom from the need to be very responsive to immediate shareholder demands is something investors in diversified portfolios actually value.”
But under the Social Media bubble debate, buzz value of LinkedIn in comparison to Facebook and stock structures is the basic question – are LinkedIn stocks worth it?
Peter Cohan of Forbes says that the management team of the organisation is powerful and the company has attracted a large customer base but says, “its (LinkedIn’s) high valuation and uncertain financial prospects make an investment in its stock a pretty risky bet.”