LinkedIn is currently the poster child for the Social Networking sector after the company’s “extraordinary” initial public offering (IPO) and recent strong performance in the fourth quarter of 2011. LinkedIn went to market at a pegged price of $45 dollars per share on May 19, 2011. The stock price has been up as high as $109 dollars per share (July 15, 2011) and as low as $59 dollars per share (Nov 29, 2011). A strong fourth quarter performance enabled the stock to rebound to the current price sitting at $87 dollars per share.
In addition to a solid fourth quarter performance, I imagine that the “successful” Yelp IPO combined with the media hype building for the upcoming heavy weight Facebook IPO may also be supporting the current stock price. But, rather than waste time and space arguing that LinkedIn’s stock price is way over-valued Realistic Stock Price Valuation, I want to indirectly make that argument by simply highlighting who is selling a relatively large amount of shares and also point out how rich the insiders “linked” to LinkedIn are becoming. And keep in mind that we are in the early stages of the Social Network Bubble and corresponding accumulation of incredible wealth amassed by insiders – wealth that may ultimately come from the wallets of outsiders.
LinkedIn (“the company”) and LinkedIn “insiders”, including venture capital firms, investment bankers, the board of directors, and the executive management team, sold just over 9 million shares to the “public” at an initial stock price of $45 dollars per share on May 19th, 2011. I put public in quotes because these initial “public” shares really go to well-connected customers of large investment banks who can then opt to dump the shares off to naive investors. After paying off the investment banker underwriters and the insiders for “their” shares, “the company” only received net proceeds of $248 million from the total $405 million generated from the IPO. Still, $248 million is nice chunk of change to further fuel “the company’s” growth. Remember, this isn’t a big company. Total revenue in 2011 was just $522 million and net earnings were just shy of $12 million. But, I want you to keep these bolded numbers in mind as I move on to talk about the early stages of wealth generation procured by “the insiders”.
Excluding the day of the IPO, “the insiders” have sold just over 5 million shares to the public amounting to proceeds of $355 million. Click here to see all LinkedIn inside trades LinkedIn Inside Trades. We must realize that not one dollar from these proceeds went to “the company”. All of this money, which is $100+ million more than “the company’s” proceeds from the IPO, went to “the insiders”. Indeed, some of these insiders are venture capital firms that took risks to invest in the build-up of LinkedIn, but believe me they have enjoyed a nice return thus far and we are only in the initial stages of the bubble. The bubble will peak during and after (just enough time for lockup restrictions to expire) the Facebook and Twitter IPOs. But, rather than focus on the venture capital firms in this post, I would like to turn the spotlight on the executive management team (select group of insiders) of LinkedIn (“the company”). These are the folks that receive annual base and bonus compensation for driving the company’s performance. They were not required to make risky investments in the company during the build-up stage and basically joined the party after the idea had taken shape.
Below is a table that shows the 2010 compensation for the key members of the executive management team and the base salary adjustment for 2011 (no actual bonus info available yet). This compensation excludes any stock option grants as I will cover that indirectly in the next paragraph. In general, these compensation plans don’t look wildly out of whack compared to compensation plans at other companies, although there was a rather big base salary raise for 2011.
Below is a table that shows how much money the executive team has made by selling their stock option grants since the IPO. Now this, in my opinion, looks wildly out of whack. Keep in mind these stock sales are almost all net proceeds as the stock grants prior to the IPO had low single digit exercise prices.
|Executive||Title||Shrs sold||% of Shrs||Proceeds|
The fact that the executive team is dumping relatively large amounts of their pre-IPO stock grants should be a clear signal that they don’t have an abundance of confidence that LinkedIn’s stock price will continue to rise over the long-term. If they had confidence in their business model they would hold their precious stock in order to make greater gains in the future. I am looking forward to see what their holdings are in the next six months to a year. Back in the good old days, you would never see the executive management team dumping such large percentages of their shares for they wanted to send the message that they believed in their ability and business model to continue driving the stock price up in the future. Here is a link to an article that questioned Weiner why insiders are selling stock so early after the IPO.Post Lockup Concerns
There are some other individual insiders that have made out quite well selling their stock positions during the last nine months. Reid Hoffman, founder and Chairman of the Board, sold 270,000 shares for $18.6 million bucks. David Sze, a Director on the board, sold 1.4 million shares for $96.8 million bucks. But Mr. Hoffman and David Sze still have plenty of shares to sell. Hoffman’s sale of 270,000 shares represent just 1% of his original holdings totaling 19 million shares. And David Sze still has 12.5 million more shares to cash in on when the time is right. The venture capital firms also have over 30 million more shares to sell. The big insiders still have time to cash in billions of dollars on a company that recently generated just $500 million in revenues and made just $133 million in cash from operations (before financing and investing activities) . LinkedIn is going to have to grow revenue, profit, and cash flow at incredible rates for many years to come in order to justify the current stock price valuation and the enormous insider wealth that has already been cashed out.
Despite the weak knees of the core LinkedIn executive team headed by Weiner, the big inside stock holders have only liquidated a small percent of their shares. Indeed, the proceeds from these relatively small liquidations are quite astounding relative to their initial capital investments, but the fact they are still holding large stock positions signals that the Social Media Bubble still has plenty more room to expand.
These venture capital firms and the founder will be my primary focus as time passes. If the Social Media Bubble is indeed a bubble and an illusion, we will certainly see them unload huge amounts of their holdings prior to the final collapse. If, on the other hand , there is no collapse and the Social Networking business model is authentic and continues upward and onward, I will be the first person to say I was wrong and congratulate these folks for a job well done. And if they make billions off a legitimate and thriving business sector I will accept their outrageous wealth accumulation with a great deal more dignity than I will if it turns out to be yet another fraud at the expense of the outsiders and the country.