Was LinkedIn’s IPO Bad for America?

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Mike Segar / REUTERS

Founder of Linkedin Inc. Reid Garrett Hoffman (C) applauds with CEO Jeffrey Weiner (R) from the bell balcony after the opening bell during the company's initial public offering (IPO) at the New York Stock Exchange in New York, May 19, 2011

LinkedIn’s public offering yesterday got a lot of buzz. Its shares surged over 90 percent on their first morning of trading and hit nearly $87 apiece after opening at $45. Today the shares are trading around $100. That’s good news for the investors who got in early and good news for the company, but is it good for the economy?

The Wall Street Journal’s Justin Lahart makes the case that it is:

If it helps rekindle investors’ interest in start-up companies, it could be a good thing. Start-ups have long been the lifeblood of the U.S. economy. They have historically been a huge source of jobs. Indeed, without them, the U.S. would experience no net job creation, according to research from from John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau. Start-ups are a key source of innovation, which has historically been the source of about half of U.S. economic growth.

All true in theory, but the way Wall Street works these deals could actually hinder jobs creation and growth. Why?  Because the banking titans who structure them aren’t always out to raise the maximum cash for the company. They’re in it for the initial run up in the stock price, what Wall Street types call the IPO “pop.” That means they price the stock cheaply, issue a restricted number of shares, and wait for oversized demand to create the maximum hype and a mega burst in the share price.

Business Insider’s Henry Blodget explains:

By underpricing the stock, Morgan and BOFA gave their best institutional clients a gift of at least $175 million. And that money came out of LinkedIn’s pockets and the pockets of the LinkedIn shareholders who sold on the deal.

Of course, the “pop” also benefits the investment banks who launched the IPO, since they typically hold onto a portion of the shares as part of their fee. LinkedIn may have actually preferred the lasting effect of a boatload of buzz to the couple hundred million more in cash it could have made off a deal with more shares starting at a higher price.

But in an economy starved of investment and jobs, that extra cash could have been put to better use. Instead of locking it away in the portfolios of pension funds and private big wigs that profited off the stock jump, LinkedIn could have used the cash to hire hundreds of employees or invested more into research and development.

After all, profits only grow the economy if they lead to real innovation. A few more private jets for a few more fat cat profiteers won’t cut it.

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