LinkedIn: Endorsed for Financial Acumen

Photograph by Niall Carson/AP Photo

Shed a tear for all those forgotten fin de siècle dot-com flameouts. Didn’t they almost have it all? For a fleeting few minutes, such companies as Excite@Home swelled with tens of billions of dollars of market cap—paper gains that just vaporized when it all went bust. If only more defunct startups had had the humility and forethought to bank some of that wealth by selling more shares when the selling was good.

Luckily, professional network LinkedIn is endowed with far shrewder financial management. The Web 6.0 heavy filed on Tuesday to raise about $1 billion in stock, following a fivefold surge in its share price since the stock made its debut a little over two years ago. The objective of the sale, as the company explains, is to “increase LinkedIn’s financial flexibility and to further strengthen its balance sheet” and “to use the net proceeds of the offering primarily for general corporate purposes, including working capital, expansion of its product development and field sales organizations, international expansion, general administrative matters and for capital expenditures, including infrastructure. It may also use a portion of the net proceeds from the offering for potential strategic acquisitions of, or investments in, complementary businesses, technologies or other assets.”

In other words, more cash—and anything we’d like to do with it.

This year alone, LinkedIn stock has risen 110 percent, giving the company a $27 billion equity capitalization. The company has pretty much cornered the professional social networking market. In its latest quarter, the network reported having more than 238 million members, an engaged user base that helped jack its revenue 59 percent higher, to $364 million, compared to the same period last year.

While I’ll accept your invite to connect and even endorse you for skills you never knew you had, I have to confess LinkedIn hasn’t done much for me, professionally. Maybe I’m going about it wrong. Maybe my mug shot isn’t great shakes. But the market harbors no such doubts. According to Bloomberg consensus data, LinkedIn’s 2013 price-to-earnings multiple of 158 is the third highest in the global Internet media sector, after Pandora and Yelp, weighing in at twice the average P/E and six times the median.

Is it mere coincidence that management is being financially opportunistic? Though LinkedIn already totes $873 million in cash, cash equivalents, and short-term investments—with no debt—today’s market is inviting it make an offering at twice the size of its initial public offering, with fewer than half the shares. Similarly, just six months after its May 2011 IPO sent its shares spiking, LinkedIn gladly came back to the market to sell more than $700 million of its hot stock.

“Leveraging their market cap growth into raising a bigger war chest is just a very smart move for them,” says Artem Mikhlin, venture partner with the Entrepreneurs Roundtable Accelerator. “They’ve been extremely effective in making strategic product acquisitions (such as Rapportive, Cardmunch, and Slideshare) and making them accessible to their user base, and they’ve barely scratched the surface when it comes to mobile and commerce opportunities.”

Selling new shares is a tricky decision for management: You are loath to dilute existing holders and you risk telegraphing to the market that you sense you’re overvalued, but the resulting cash in the vault is an ironclad asset. Witness how Tesla’s Elon Musk recently sold a chunk of his surging stock to raise more than $1 billion to reinvest back into the carmaker and pay off a government loan. The market ate up the move, sending Tesla’s shares ever higher.

LinkedIn’s shares are down marginally on news of its latest offering. They have more than tripled since its last sale less than two years ago. Today’s is a generous market environment: Wall Street can’t print pitch books fast enough. Much of the smart money is busy selling. You could do a lot worse than to use the window to bank $1 billion.

Give credit—rather equity, then cash—to LinkedIn management.

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