Wednesday, May 18, 2011
What is a company worth? Good question. It is a matter of perception and of expectation. Nowhere do those two psychologies interact more than in an Initial Public Offering -- such as this IPO. Who is to say that LinkedIn is worth $42 to $45 per share. It is what the market will bear, and LinkedIn's underwriters sense a larger demand for the stock. Will LinkedIn hold its value six months from now? Who knows? Most IPOs come down to earth sooner or later. By then the underwriter and initial investors are gone. It's the next investors who value the stock against its peers and establish a price that is closer to the financial statements of the company. IPOs have always amazed me for the extent to which normally rational investors can act in a foolhardy manner -- bidding up a new stock that has no record of sales and earnings. There is as much or more "flackery" involved in the IPO market as selling underwater real estate, and it will never change. There are always those who invest on the basis of hope.