- LinkedIn IPO
Below is a snapshot from the final prospectus for LinkedIn’s May 2011 IPO (some of the numbers have been rounded to make calculations easier):
7,840,000 Shares
Class A Common Stock
LinkedIn Corporation is offering 4,840,000 shares of its Class A common stock and the selling stockholders are offering 3,000,000 shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares of Class A common stock.
Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except with respect to voting and conversion. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock will be entitled to ten votes per share and will be convertible at any time into one share of Class A common stock.
Our Class A common stock has been approved for listing on the New York Stock Exchange under the symbol “LNKD.” Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 13.
OFFER PRICE $45.00 PER SHARE
For parts 1) through 5) below, assume the underwriters were granted an over-allotment option of 15%, and that this option was fully exercised. Also assume the over-allotment is fulfilled by increasing the number of new primary shares offered by the firm.
- For this offering, the underwriters charged a 7% spread. What was the total dollar compensation paid to the underwriters for this deal?
- What were the total proceeds to the firm?
- On the first day of trading, LinkedIn’s class A shares closed at $94.25. What was the total dollar amount left on the table due to underpricing?
- Prior to the IPO, the firm had no class A shares and 89,671,000 class B shares outstanding. The 3,000,000 class A shares offered by “the selling stockholders” came out of the existing class B shares. After the issuance, what percentage of the voting rights will the public shareholders (i.e., all class A shares) control? Assume the over-allotment is fulfilled using additional new class A shares.
- If the share price fell to $41 after the issue started trading, the investment bankers will buy shares on the open market to cover the over-allotment. In this case, what would be the total profit earned by the investment banks from the combination of underwriting fees and trading profits?
- Rights Offer
Olin’s Olives currently has 60 million shares of stock outstanding at a price of $40 per share. The company would like to raise money and has announced a rights issue. Every existing shareholder will be sent one right per share of stock that he or she owns. They plan to require 3 rights and $30 to purchase one new share.
- Assuming the rights issue is fully subscribed, how much money will it raise?
- What will the share price be after the rights issue?
- How much is each right worth?
Suppose instead that the firm changes the plan to require 1 right and $10 to purchase one new share.
- How much money will the new plan raise?
- What will the share price be after the rights issue?
- Are shareholders worse off under this plan? Why or why not? Show this by comparing shareholders’ value before and after the transaction.
- Case #3: The Hertz LBO
Read the case “Bidding for Hertz: Leveraged Buyout” and write a brief answer to the following questions:
[Note: We will discuss these issues in class. You do not have to go beyond what is in the case text and your own intuition in answering the assignment questions.]
- What are the anticipated sources of value from the proposed LBO transaction? Which market frictions could be addressed by this type of transaction?
- Do you think Hertz is a good candidate for a high debt level? Why or why not? Think about the nature of their assets and cash flow properties.