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LinkedIn could herald the return of the big IPO

Success breeds followers. So will LinkedIn's blockbuster IPO lure scores of private companies to the stock market?
/ Source: The Associated Press

Success breeds followers. So will LinkedIn's blockbuster IPO lure scores of private companies to the stock market?

"One company does not make a trend, but it can certainly help," says Mark Heesen, president of the National Venture Capital Association, the venture-capital community's trade group.

LinkedIn Corp. jumped 109 percent on its first day of trading Thursday. Financial news channels tracked the company's soaring stock as it lifted off, turning its backers into millionaires and maybe more on paper. A dazzling debut like that, Heesen says, is bound to encourage eager entrepreneurs and the investors who back them to follow LinkedIn's lead.

The networking web site raised $352 million from investors, and then more than doubled from its $45 opening price. The stock slipped 1 percent Friday to $93.09.

LinkedIn is the biggest example of a trend that's already under way but has escaped much notice until now. The market for initial public offerings has finally emerged from a long drought. Car-sharing service Zipcar Inc., hospital chain HCA Holdings and others have raised $24 billion through initial public offerings so far this year, according to data provider Dealogic. That's more than triple the amount during the same period a year ago.

Kathleen Smith, a principal at the IPO advisory firm Renaissance Capital, says that if companies keep going public at their current pace, more than 200 companies would raise $50 billion this year. It would easily be the best year for IPOs since the Internet bubble popped.

"2011 could be the best year since 2000," Smith says.

One reason for the rush of companies wanting to go public: They are joining a two-year rally. The typical newly listed company lost half its value in 2008, using Renaissance Capital's IPO index as a gauge. The index, which tracks returns on companies listed in the previous two years, jumped 20 percent last year and is up 3.4 percent so far this year.

"In the long run, the market only works if these stocks trade up," Smith says.

Strength in the IPO market can start a virtuous cycle, Heesen says. Venture capital firms hoping for a LinkedIn-sized payday are encouraged to back more entrepreneurs. Investment banks are more willing to line up investors and take companies public. And after going public, companies are likely to use their cash to hire more workers.

The financial crisis upended all markets in the fall of 2008. But the market for IPOs remained bleak longer than others. Just two companies went public in the first three months of 2009.

"Those were the Death Valley days," Smith says.

Now, some 165 companies have filed with the Securities and Exchange Commission to open their companies up to public investors, the largest lineup since 2000. The list includes Dunkin' Donuts, Spirit Airlines and Yandex, a Russian internet search company. Both Spirit and Yandex are set to debut this week.

LinkedIn's ascent on Thursday naturally brought comparisons with the tech bubble and IPOs from companies like Netscape, and Consider LinkedIn's valuation. At a market value of $8.8 billion, the company is already worth 18 times its projected sales this year. Major internet companies like Google go for an average of five times projected sales, according to an analysis by Capital IQ.

But the current breed of IPOs is different, says Jay Ritter, a finance professor at the University of Florida. In the 1990s, an average of 300 companies went public a year, and they were mostly small start-ups. In 2010, 171 companies went public and many were established companies.

LinkedIn is hardly a fledgling Internet website. It earned $3.4 million last year on $243 million in revenue. "LinkedIn is not a small company," Ritter says.

Another key difference: the companies going public now are more likely to be profitable, whereas tech-bubble companies were more likely to sell the promise of profits. According to Renaissance Capital's data, 70 percent of companies that went public in the tech bubble were losing money. Today, 70 percent of companies that go public have already turned a profit.