Ipo of Linkedin

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an extraordinary growing period in the next three years is reasonable. However, the growth rate of LinkedIn after then will not directly decrease to 6%. Therefore, the assumption of Morgan Stanly that LinkedIn will have an extraordinary growth period of 10 years (from 2011-2020) is more reasonable.

Valuation Model: According to the analysis given above, the two-stage DCF model is appropriate to value the firm. The extraordinary-growth period is from 2011 to 2020, and the constant-growth period is afterwards. The terminal year is 2020.

Cash Flow: This report uses EBITDA to measure cash flow because it’s what the firm generated before any distribution to stakeholders, and calculates the EBITDA from EBITDA margin and deducts tax (tax rate assumed is 30%). The assumption given by JP Morgan that the EBITDA margin is 23.10% in 2020, is reasonable, because it is similar to the historical amount from prior years. Additionally, for 2011-2019, this report uses a linear adjustment to let the margin slowly increase to the target margin in 2020.

Cost of Capital: This report holds that the assumption of JP Morgan, which estimates the cost of capital to be 10.5%, is reasonable. Because LinkedIn’s beta is already known (1.5), estimated risk premium to be 5% and risk-free rate to be 2.6%, the cost of equity should be 10.1%. As WACC must be lower than cost of equity, this report uses 10.5% as cost of capital.

The detailed calculation is illustrated in Exhibit 5. After the value of the firm is calculated, the value of debt is deducted from and cash is added to the value of firm. To conclude, the market value of LinkedIn’s equity is about $3 billion.

Sensitivity Analysis: According to Exhibit 6, the major driver is the terminal growth rate.

VALUATION ASSESSMENT

Our team can’t agree with the $9 billion valuation in the case. This $9 billion represents the market value of equity of LinkedIn on the day after one month of IPO. It is calculated by the closing price on July 7, 2011, $94, times the total shares of LinkedIn, which is 94.5 million, including Class A shares and Class B shares. To use these two data to calculate the market value of equity, the writer of the case made assumptions that all the shares of LinkedIn have the same value and this value equals to the closing price of that day. Our team thinks that these fundamental assumptions are not reasonable. First, LinkedIn had both Class A and Class B shares. All shares sold as part of the IPO were Class A shares while all remaining shares were Class B shares. The number of Class A shares is only 7.84 million while the Class B shares kept by company has a relative huge number of 86.66 million. Since the Class B shares can’t be traded in market, their liquidity is limited. Investors can’t pay $94 and get one Class B share and if LinkedIn wants to trade these shares, the company must wait for some time and spend expense of underwriting. The difference between the numbers of tradable and untradeable shares is so huge that we can’t use the market price as the value of all the stocks. So, that is a reason that we think that these 88.66 million Class B shares didn’t have a value equaling to the market price. Second, the Class A shares had one vote per share while Class B shares had 10 votes per share. That is the other reason that we think the values are same. Third, the closing price on July 7, 2017 is larger than the price at the day of IPO. In one month after a new IPO, the company’s stocks are often over demand so the price at that point may be higher than its truly market value. So, it is a doubtful that the writer just used $94 as the stock’s market price in valuation. In conclusion, the different characters of the various kinds of shares and the choices of price are all factors that may affect the valuation.

After IPO, LinkedIn’s stock price experienced a short-term increase to July 28, 2011, and then decreased gradually to December 27, 2011. It is consistent with our valuation because we believe that $9 billion is higher than LinkedIn’s actual value.

APPENDIX

Exhibit 1

Xing LinkedIn

Market Cap 192 409.64

NI 7.21 15.39

Hiring Solution Premium Subscription Market Solution Total LinkedIn

Revenue $101,884 79,309 61,906 $243,099

Weight 41.91% 32.62% 25.47% 100.00%

EV/EBITDA 15.20 11.54 21.13 15.52

EBITDA 47959

EV 747308.65

Exhibit 2

Exhibit 3

Facebook twitter LinkedIn

EBITDA 2000000 71100 47959

enterprise value 51200000 2655000 1255511.86

weight 95% 5%

EV/EBITDA 25.6 37.34

comparable multiple 26.18

equity value 1258620.86

Exhibit 4

Exhibit 5

Exhibit 6

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