After raising the low end of its stock price in the days before the IPO, "early indications and the investment community's keen interest in the offering had pointed to a successful IPO... the target price exceeded the high end of its pricing range..." Sound familiar? No, it's not a contemporary news report about LinkedIn: that's CNET reporting on the GeoCities IPO back in August 1998.
Nothing exceeds like excess, and the run-up in the stock price for LinkedIn following its IPO this morning is indeed impressive, if not excessive. Only time will tell whether the valuations are reasonable or unreasonable, but there is plenty of reason to be suspicious. At the beginning of the month, LinkedIn said it would sell shares for $32-$35, but then raised this to a range of $40-$45 earlier this week, due to intense demand. However even this turned out to substantially understate investor interest: shares opened at an astonishing $83 this morning before soaring to $122.25 by this afternoon.
Essentially the valuation of LinkedIn as it went to market quadrupled in about two weeks, from $3 billion to $12 billion, during which time nothing much happened -- except, of course, for all the breathless reporting and anticipation surrounding the IPO. In the absence of any material developments affecting the company's well-being, the only explanation (in my humble op-ed) for this remarkable run-up is the self-fulfilling phenomenon of a stock market stampede. In other words, people keep bidding up the stock price because the stock price keeps going up.
All this made me nostalgic for the first Dot.com bubble, lo those many years ago, and I looked around for a company that might be roughly comparable to today's social media giants. While there were many obvious differences, Geocities had some noteworthy similarities to LinkedIn, including rapid growth in its user base (slowing somewhat by the time of the IPO) and a mixed revenue model combining advertising, corporate accounts, and subscriptions.
In the weeks before its IPO GeoCities raised the low end of its price range by 14%, acknowledging pent-up investor demand. After floating 4.75 million shares on August 11, 1998, GeoCities saw its share price increase 118% from $17 to $37.12 by the end of the first day of trading. On the second day, it increased another 22% to $45.50 -- having almost tripled in price in the first two days of trading, despite an otherwise volatile stock market.
In the following months GeoCities traded in a range between $13.25 and $51.40, closing 1998 at $33.63, then doubling less than a month later. And then came the second big run-up, spurred by Yahoo's acquisition in January 1999: from $75 the day before the Yahoo offer, the share price jumped to $124.45 as Yahoo made its $2.87 billion acquisition offer.Of course, that's not the end of the story. You may recall that in April 2009 Yahoo closed GeoCities. It's true that LinkedIn hasn't been acquired by Yahoo, saving it from the Yahoo acquisition curse, but I still have to wonder whether the current social media investment craze isn't following the same tragicomic arc first traced by companies like GeoCities a decade ago.