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Friday, 31 October 2014

Why not?

LinkedIn's toppy stock sale is better than buying

LinkedIn’s toppy stock sale looks a lot better for shareholders than an overpriced buyback. The $27 billion job-focused social network is raising another $1 billion. With $900 million in cash and rising profit, it doesn’t really need the money. But when a company trades at over 1,000 times reported 2012 earnings and more than 800 times estimated earnings for this year, selling stock makes sense.

LinkedIn plans to use the funds for international expansion, product development and perhaps a small acquisition or two. But it has had no problem undertaking similar activities since it went public in 2011 and it hasn’t needed additional funds – in fact it has added to its cash hoard.

The company’s generous-looking valuation offers a better explanation for the share sale. LinkedIn’s stock price has increased fivefold since its initial public offering. Its prospects remain bright. But few companies can live up to the kind of hope implicit in price-to-earnings ratios running to four digits. Selling now allows the company to more than double its cash cushion while barely diluting existing shareholders. That’s simply prudent.

It’s also a welcome departure from the tendency of companies to sell their own stock when it’s cheap and buy when it’s expensive. As one example, the pace of share buybacks plunged in early 2009 when stock market valuations were at their post-crisis lows. LinkedIn seems to appreciate the benefit of selling high, which will give it financial flexibility for acquisitions and expansion should its stock price or the broader market tumble. Perhaps it will eventually reverse the trick and repurchase stock at a bargain basement price.

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Context News

LinkedIn said on Sept. 3 that it will sell $1 billion of shares in an underwritten offer. The underwriters will have the option to buy another $150 million of shares.

The social network plans to use the funds for general corporate purposes, product development, international expansion, and general capital expenditure. It may also use a portion of the proceeds for acquisitions.

LinkedIn’s market capitalization is $27 billion, and the shares trade at 181 times estimated 2013 earnings.

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