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JP Morgan Helps Pump Up LinkedIn, Then Kicks It Back Down

LinkedIn (LNKD) scored a $4.5 billion valuation in its IPO. As one of the IPO's underwriters, JP Morgan (JPM) was one of those responsible for helping establish that price in the first place. Now that LinkedIn is out of the gate, however, JPM has done an about-face and downgraded LinkedIn shares.

That's right -- the skyrocketing stock price, still well above the initial offering price, has led to a valuation that JPM analyst Doug Anmuth now finds a little too rich. It almost seems reasonable -- after all, analysts should exercise their judgment independent of the investment bankers who tout clients' stocks. (And should tell their readers to buy low and sell high, which they so rarely do.)

But look at the evidence and the whole deal begins to develop the aroma of last week's fish.

Setting up the roller coaster
Underwriters like JPM set up the conditions in the first place:

  1. LinkedIn's pre-IPO road show had prices in the low $30s.
  2. The initial offering price suddenly jumped to $45.
  3. The price immediately doubled at the IPO.
  4. Suddenly all the underwriters initiated coverage at target prices between $85 and $92. JPM started with an "overweight" rating and a target price of $85.
How did a company whose shares were first worth something in the $30s and then $45 magically double in value? Wall Street Magic. First, JPM and others pointed to IDC research that claimed the market for "worldwide talent and acquisition services" was $85 billion. Ta-dah! Suddenly the market cap tripled from $3 billion to $9 billion.

But what really fueled the jump was underwriter insistence on a low-float IPO in which only a small fraction of all shares were offered to the public. Low floats generally render share prices rather mercurial. With a small amount of stock publicly traded, trends and price changes get magnified because they affect a disproportionate percentage of shares.

What worried Anmuth was that, with a market cap of $9.7 billion, LinkedIn was closing in on Netflix (NFLX), whose market cap is $15 billion. But the video streaming and DVD service brings in about 8 times the revenue of the Little Business Social Network That Almost Could (given that most of its users don't even pay monthly visits to the site).

Pay no attention to the man behind the curtain
Really? This just occurred to him? So what would be reasonable? A market cap an eighth that of Netflix? That would send the value of LinkedIn down to about $1.2 billion -- or just a quarter of what it was back when JPM helped set the price. Let's make it easy: drop the stock price from $105 to about $30. Oh, wait, that's what LinkedIn wanted to do in the first place, even though it's below what the JPM investment bankers set (probably expecting the price to shoot up, if you ask people like Jim Cramer). And it would be almost a third of what Anmuth set as his "target price."

Banks are supposed to keep a firewall up between the investment bankers, who actively try to push stock prices as high as possible, and the equity analysts, who are supposed to consider what is good for investors. But when valuations and recommendations lurch back and forth, you can be forgiven for wondering how above board all the activity is.

After all, earlier this month, JP Morgan Securities agreed to pay $228 million to settle charges by the SEC and others of "fraudulently rigging at least 93 municipal bond reinvestment transactions in 31 states, generating millions of dollars in ill-gotten gains."

Coincidence upon coincidence
Ah, but no, that must have been an accident. Just like JP Morgan's agreement last month to pay $153.6 million to settle charges "that it misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet." Or when the bank agreed to pay $75 million in fines and forfeit $647 million in fees in 2009 to settle charges that it paid friends of public officials to win some municipal bond business in Alabama. All complete coincidence.

As they say in the investment business, past performance is no guarantee of future results -- but you've got to wonder. It couldn't be that JP Morgan might be trying to ... nudge the market one way or the other to somehow benefit -- like from shorting LinkIn's stock or buying more and then creating a rationale of why it's suddenly more valuable -- could it?

But then, that past performance was in bonds, not high tech stocks. Surely you can see the difference? And if you can, and you're in high tech management, maybe you need to take a couple of doses of reality and call your broker in the morning.


Image: morgueFile user bella_domanie, site standard license.