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Was the IPO of LinkedIn successful? Valuation of the company and its business model

Seminar Paper 2016 24 Pages

Business economics - Investment and Finance

Excerpt

LinkedIn: A successful IPO? - Valuation

Abstract

LinkedIn´s Business Model at the Time of the IPO
Hiring Solutions
Marketing Solutions
Premium Subscriptions

LinkedIn´s Opportunities and Threats at the Time of the IPO
Opportunities
Threats

LinkedIn´s Competitive Landscape at the Time of the IPO
Analogs
Job Boards/Online Recruitment
Social Media Networking/Search Engines

LinkedIn´s Company Value – Multiple Analysis
EV/EBITDA
EV/Sales
EV/User

LinkedIn´s IPO – Brief Details
Facts
Rumors

LinkedIn´s Share Value – July 7,

References

Appendices
Appendix A
Appendix B

List of Tables

List of Figures

Abstract

This paper explores LinkedIn’s business model (including opportunities and threats), as well as the corporation’s competitive landscape and the details of the initial public offering (IPO). In this paper different approaches to assess a company value will be discussed, followed by an examination of LinkedIn’s company value by carrying out a multiple analysis. A special emphasize will be taken on the closing price for LinkedIn shares on the IPO (and also a few weeks later on July 7, 2011), were the company was worth 592 times its 2010 earnings (Russolillo & Conway, 2011). The research evaluates if the company could possibly be worth that much or if a general hype for social media company´s has taken over.

Keywords: LinkedIn, initial public offering, multiple based valuation analysis

LinkedIn: A successful IPO? - Valuation

Why and to what extent, an IPO is successful, lies always in the opinion of the different stakeholders of this event. Obviously there are two main stakeholders: the company owners and the investors.

For company owners, an IPO will be about developing their company to the next stage. Raising new capital for investment, attracting and incentivizing the best talent, and establishing a liquid currency for the future. For them, valuation[1] at IPO and a healthy aftermarket with a steady appreciation in the value of the shares as the company develops, will be key (Barb, 2014). This statement is also emphasized by what LinkedIn Chief Executive Jeffrey Weiner said after the IPO. "To be honest with you, I didn't give a lot of thought to what the opening would be like," Mr. Weiner said. "This isn't necessarily indicative of anything. The market will do what it will do. What we are completely focused on is our long-term plans and our fundamentals, and getting that right." (Russolillo & Conway, 2011).

For investors obviously an IPO is successful, if the share price is going up, not down. But since nobody can tell that for sure, how do you decide if you invest your money at an initial public offering of a certain company? There are various ways to do that, some people decide just to go with the flow, jumping on a train that’s already under full force (e.g. dot.com hype). Other will do an extended research for the opportunities, growth potential and threats of the business model, as well as the possible competitors and challenges they will face in the future. Some, on the other hand, will go for the figures and financial analyses. Since there is a saying “the only statistics you can trust are those you falsified yourself” (mostly allocated to Winston Churchill, but not verified), it seems logical to build the decision on all three factors.

In any case it will not be a successful IPO for both of them, if the circle does not work out. Has the business model or the figures crucial flaws, the investors will likely bail out, and the shares are dropping down. With that, a crashing share price, the company owners will find themselves in the situation of a very unsuccessful IPO.

LinkedIn´s Business Model at the Time of the IPO

Basically LinkedIn is another social networking platform, where people register with a personal account and connect themselves with other people.

If you dig a little deeper the insight will be the following: A users (private person) establishes a personal account with the information of his CV and requests to be connected to another private person/business associate. With the connection he is giving them access to his professional and educational background and messaging rights. So far so good, not that special, but ultimately, users form a kind of directory of not only these so called “first-degree connections”, but will see immediately an extended contact network, including the contacts of each of these connections. These are so called “second- and third-degree connections” (Rodriguez, 2014).

This means, if you are on a job hunt, your chances to find a person who knows a person that knows someone that has a job match for you, will multiply a lot! These connections can be exploited to get an introduction, whether to find a job or take advantage of a business opportunity.

Users can also follow companies, and will be notified if a new job offer is out. They can check who had viewed their profiles, and also bookmark the job offers for which they like to apply.

At the time of the IPO LinkedIn was one of the largest social networks, and probably the most mature/business professional one of the major social networking businesses. LinkedIn’s profit depended on several already known business models, like job boards, etc. (Hobart, 2011).

The three important revenue streams LinkedIn had at this time were, according to the Corporations SEC filling form S-1, hiring solutions, marketing solutions & premium subscriptions. LinkedIn had a so called “freemium[2] ” offer and monetized offer (see Appendix A (LinkedIn, 2011)).

Hiring Solutions

In the SEC filing LinkedIn (2011) states that they chance the job board market with their hiring solutions, by providing unique access to candidates who are active job seekers, and simultaneously also to passive candidates, who are not actively on the job hunt.

LinkedIn (2011) offered furthermore the ability to automate talent matching, post jobs, engage and educate candidates, streamline applications and even validate information.

They stated that their solutions would be both more cost-effective and more work efficient than traditional recruiting approaches.

According to LinkedIn (2011) the revenue from their hiring solutions was derived primarily from the sale of the LinkedIn Corporate Solutions and the LinkedIn Jobs products. LinkedIn Corporate Solutions allows human resource companies or individual to identify job candidates based on industry, job function, geography, experience, education, and other specifications. Furthermore they could purchase job slots to utilize job postings.

This insight was assessed by Hobart (2011). He mentions that Hiring Solutions would be LinkedIn’s most effective vehicle for monopolistic pricing. This would be exactly the revenue stream to look at, when considering LinkedIn as a job board analog because of the monetization strategy.

Marketing Solutions

For this revenue stream the SEC filing of LinkedIn (2011) showed that the marketing solutions help enterprises to reach a large audience of important business professionals and also connect them to relevant products and services. The customers will be enabled to create, promote and control their corporate identity and enhance their brand awareness. Furthermore the customer can pursue business-to-business marketing, prosumer marketing and marketing to mass consumers.

LinkedIn (2011) stated the costumers would use their solution to create an online brand and corporate identity, as well as engage in highly targeted marketing campaigns, etc, all at scale and on a cost-effective basis. This should be particularly attractive to SMEs and other organizations that have limited resources.

According to LinkedIn (2011) their marketing solutions would provide advertisers with the ability to target audiences based on the members’ profile information, including title, function, company name, company size, industry and geography. Additionally, their detailed advertising campaign reports would provide advertisers with insights to further maximize the return on advertising budget.

Furthermore they wrote that the revenue from their marketing solutions was derived primarily from fees they received for displays and text ads on their website. An interesting feature was the self-service advertising solution that allowed customers to directly create and place ads on prominent pages on the website. This revenue would be generally recognized when the advertising “impression” was displayed on their website (LinkedIn, 2011).

According to Hobart (2011) LinkedIn's marketing revenue is the “icing on the cake”. He valued that LinkedIn as a large site with a captive audience generates a lot of page views. And that LinkedIn is good in selling them. For him marketing and hiring solutions are high gross margin businesses. And LinkedIn has been able to continuously raise revenue per customer even as they go after more customers. This means that they haven’t nearly hit the point at which this market is mature.

Premium Subscriptions

The paid premium subscriptions on LinkedIn enables a user, for example, to be listed at the top of the human resource hiring application, or allows to directly contact other users outside their networks. They can see who has looked up their profile without limitations and get more powerful search tools to near down the results. For individuals (private persons) the paid subscription ranges from $15.95 to $49.95 per month. For businesses the price ranges from $19.95 to $99.95 (Albarran, 2013).

LinkedIn’s (2011) information on that part was that they would sell various subscriptions to customers that allowed users to have further access to premium services via their website.

This revenue was derived primarily from online sales of the Business, Business Plus and Executive subscription products. These products provide the customer, acting as individual or on behalf of their company, with access to more tools and features than the freemium. Such as enhanced search results, enhanced communication capability, priority customer support, etc.

LinkedIn´s Opportunities and Threats at the Time of the IPO

Opportunities

Generating more revenue is either possible in growing the sales of already existing business solutions/products or in offering new business solutions/products.

The growth in hiring solutions will largely depend on the ability of LinkedIn to grow the customer pipeline while maintaining strong renewal and upsell rates with current customers. This will depend mostly on an increased productivity from the field sales, but also on minimizing cancellations (LinkedIn, 2011).

In 2010, the hiring solutions were used by nearly 3,900 companies, including 69 of the Fortune 100, but also by SMEs. The revenue of LinkedIn's quarterly per user has risen from about $.17/user to $.33/user. This is an interesting reflection of the site's network effects: with higher and higher utilization, it becomes easier for LinkedIn to offer the very best applicant for a given set of criteria (Hobart, 2011).

Growth in the marketing solutions will largely depend on the ability to increase the number of registered members, level of member engagement and advertising inventory. Additionally on the ability to increase awareness of the solutions among marketers, and the overall growth in online advertising budgets (LinkedIn, 2011).

In 2010, the marketing solutions were used by more than 33,000 customers. The quarterly revenue per user has grown from $.16/user to $.24/user. This is very good and shows that they scaled their sales force up to be appropriate for the number of page views they handle. Just combine that with their user growth of 13.7% per quarter, and the result is a massive ad platform with nearly unlimited growth in the future, as long as they can generate new users (Hobart, 2011).

The growth in premium subscriptions will largely depend on the ability to increase the number of registered members and the level of member engagement. Additionally on the ability to continue offering products that their users will find compelling, while minimizing the number of cancellations and downgrades (LinkedIn, 2011).

Unfortunately this revenue per user has declined in the last six quarters, from $.29/user to $.19/user (Hobart, 2011). There we see it very clear that LinkedIn´s success and growth depends on the number of new members and member activity level.

Probably a best-case scenario for LinkedIn would be to find a new stream of revenue, adding more high-margin profits to the already existing revenue streams. But even if they won’t, they're already in a very good position. All of the major revenue streams are growing well, what implies that additional users[3] through an international expansion will not seriously disrupt things, and that additional sales staff will most probably offer a useful contribution (Hobart, 2011).

In summary, some could say, the growth opportunities for LinkedIn are above average compared to other “traditional” recruiting companies, e.g. Monster or Dice.

Threats

There are various threats for LinkedIn’s business model and since the solutions that bring the most revenues are hiring and marketing solutions, these revenues depend highly on the human resource lifecycle and the labor market.

[...]


[1] Valuation is the economic value of a company as determined by a number of quantitative and qualitative factors that is often used to determine the price at which a business, or shares of that business, will be bought or sold. In early stage investing you will often see pre and post-money valuations.

[2] Freemium is a pricing strategy by which a product or service (typically a digital offering or application such as software, media, games or web services) is provided free of charge, but money (premium) is charged for proprietary features, functionality, or virtual good (Hayes, 2008).

[3] Which are very likely to come, since in 2010 only 29,2% of the world population were internet users, while this number increased steadily over the last 10 years (Internet Users, undated)

Details

Pages
24
Year
2016
ISBN (eBook)
9783668396258
ISBN (Book)
9783668396265
File size
900 KB
Language
English
Catalog Number
v346955
Institution / College
Technical University of Munich – Financial Management and Capital Markets
Grade
1.0
Tags
LinkedIn initial public offering multiple based valuation analysis IPO

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Title: Was the IPO of LinkedIn successful? Valuation of the company and its business model