LinkedIn came out with an IPO and became an instant hit. I am personally against IPOs – and my reasons have nothing to do with LinkedIn. I am on LinkedIn and have benefited by being on it.

However I am not for buying an IPO -EVER. Now LinkedIN was a company created in 2003 and it was doing well in 2008 and 2009. Who decided to do the IPO in the year 2011 instead of say 2007 or 2009? Well, it is the merchant banker and the management of the company.  So that is how the year 2011 was chosen.

Who priced LInkedIn at $ X instead of $ Y? Well again it is the same combination of the board of directors and the merchant bankers. Assume that they had done their home work and decided that this was a good price. Rather they thought this is the price at which the share will sell. If they felt it could sell at say 1.2X $, they would have priced it at that price.

How did the market decide to price it at 3X $? well we do not know. Does the cash flow justify it. Well that you will know ONLY WHEN YOU SEE THE FUTURE CASH FLOWS. Today to say it is over-priced or under-priced is of no use. Currently you are buying it on hope – and hope is not a good strategy!

In general just buying an IPO and hoping to make money in the days of smart (over smart?) management, rigged markets, aggressive merchant bankers and a rising market is a TERRIBLE time for IPO buying. IPO buying in a down market (if there is any company desperate enough!) is a far smarter idea. In the current market very few IPOs will leave you any money on the table.

Stay away from an IPO at least in the current situation, or you will be hit by a ‘buyers grief’…almost immediately on listing. There is a lot of research in the US about people not being able to make money on IPOs. In India there is no such research so I have no data to say what would have happened if you had put say Rs. 100,000 in each of all the IPOs and NFOs that came. I guess you would have horribly underperfromed the bank interest, forget the index or the better fund schemes.

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  1. It is always difficult to take a call to buy the stock of high tech companies. It does not matter whether it is during IPO or post IPO. The cashflows would certainly be not linear. One right product could change the entire face of the company as it happened incase of Apple, Google or Microsoft. Until we know of their R&D and what future products are in pipeline, the true valuation could never be predictable. Studying balance sheet and history of profits is of no meaning to take a call on buy or sell. It is my view that the plain financials do not work for such type of companies and is beyond the regular pundits analysis.

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