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LinkedIn IPO stokes social media frenzy

May 18 2011 13:57

New York - LinkedIn said it expects to raise 30% more than it had forecast in its initial public offering, in a sign of the strength of investor appetite for social networking companies.

The company, which operates a website where professionals connect with one another, now plans to sell shares at $42 to $45 each, up from a previous range of $32 to $35.

At the middle of that range, the nine-year-old company would be valued at $4.11bn.

The new price range values LinkedIn at almost 17 times its 2010 revenue. That is about half the valuation multiple that investors are giving to Facebook, which is expected to go public in April 2012 and now has a market value of around $70bn.

Both companies are expensive compared with other tech stalwarts, including Google, whose shares trade at about six times revenue.

To some investors, LinkedIn's valuation is too high.

"I wouldn't touch the stock, I wouldn't own it, not at $45, not at $43," said Eric Jackson, managing member at hedge fund Ironfire Capital.

He might be willing to buy it at a much lower price, like around $25 a share, he added.

The stock market's reception of LinkedIn will be an important gauge of investor appetite for social networking, including the Big Four of the social media space - Facebook, Twitter, Groupon and Zynga - which are widely expected to go public in coming years.

LinkedIn's growth has been rapid: It doubled its revenue last year to $243.1m and posted net income for common shareholders of $3.4m.

However, in the risk factors section of its prospectus, the company disclosed it does not expect to be profitable in 2011.

"Our philosophy is to continue to invest for future growth, and as a result we do not expect to be profitable on a GAAP basis in 2011," the filing said, referring to generally accepted accounting principles.

It is not uncommon for an unprofitable company to seek a US public listing, but it could give investors pause to see a company bluntly forecast swinging to a loss during its first year as a publicly traded stock.

"If LinkedIn goes out and doesn't trade well that could present a problem marketing other social media companies going forward," said Yvan-Claude Pierre, a corporate lawyer at DLA Piper in New York who has represented companies that are going public.

Companies such as Facebook, Twitter, Groupon and Zynga have stoked investor interest in social media companies and command multibillion-dollar private market valuations.

But there are signs investor appetite could be waning. Renren, a company sometimes called the Facebook of China, went public in the United States earlier this month. Its shares soared 29% in their debut, but have since dropped below the IPO price.

French social networking site Viadeo, the second-biggest social networking site for professionals behind LinkedIn, said on Monday it would defer plans to go public.

Ironfire's Jackson thinks LinkedIn has some positives, including its built-in professional audience, but its biggest problem is its bottom line.

"LinkedIn has its niche and Facebook has its niche. Facebook's is much bigger and much more profitable," Jackson said.

Of the 7.84 million shares LinkedIn is offering, 4.83 million will come from the company and the rest from stockholders.

LinkedIn co-founder and ex-PayPal executive Reid Hoffman is among the stockholders selling shares in the IPO, but he will still have 21.7% of the voting power in the company after the offering. LinkedIn began in Hoffman's living room in 2002.

Other big stakeholders selling shares in the IPO include Goldman Sachs Group, Bain Capital Venture Integral Investors LLC and McGraw-Hill Cos.

LinkedIn, based in Mountain View, California, helps professionals find new business contacts and reconnect with old ones.

"It's like a Rolodex on steroids," said Rich Stromback, a venture capitalist who uses LinkedIn frequently.

Underwriters on the offering are being led by Morgan Stanley, Bank of America and JPMorgan. The company's shares are expected to begin trading on the New York Stock Exchange on Thursday under the symbol "LNKD." 

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