Professional networking site LinkedIn is planning to offer more shares to protect its stock price from plummeting in the coming weeks.
According to a filing this week with the Securities and Exchange Commission, LinkedIn and its top shareholders plan to sell 8 million more shares in a secondary offering. The filing said that about 1.3 million of those shares will be sold by LinkedIn, while the remaining LinkedIn 6.7 million shares will be sold by stockholders. The offering is expected to help the company generate $100 million and its shareholders a sizable sum of their own.
But LinkedIn's offering is not about raising cash. Instead, the company is offering more shares to protect its stock price following a mandatory 180-day lock-out period that bars employees and early investors from selling their stock. Now that the lock-out period is coming to a close, LinkedIn's top executives and investors, including Sequoia Capital, want to sell and cash in. And in the process, LinkedIn's shares could drop significantly.
Although LinkedIn wouldn't say that the offering is designed to bolster its stock price, the company did acknowledge that it will "facilitate an orderly distribution of shares for the selling stockholders in the offering and increase our public float."
It's that last bit about float that has proven most dangerous to LinkedIn's shares. In the investment world, float refers to the difference between a company's total outstanding shares and its restricted shares. The smaller the float, the more volatile a stock might be. When LinkedIn went public, its float was inordinately low, at about 9 million shares, which has prompted the company to take this step and just about double its float to make its stock more stable.
LinkedIn went public at $45 per share in May, and skyrocketed to $122.70 by the end of the day. Over the last several months, it has come back down a bit, but it closed the day yesterday at $74.86.
That said, LinkedIn has come under fire from analysts and investors who are concerned that the company's share price isn't necessarily justified by its financial performance. Over the last several years, LinkedIn has only been profitable once--in 2010 when it posted a profit of $15.38 million on $243 million in revenue for the year. Prior to that, the company had posted $4 million to $5 million losses annually.
Looking ahead, Groupon investors might also want to be prepared for a secondary offering. That company, which went public earlier this month and watched its shares soar 31 percent in their first day of trading, also has a very small float, potentially paving the way for a LinkedIn-like scenario to play out when its top executives and investors want to cash in after the lock-out period.
LinkedIn has so far not said when it will hold its secondary offering, and the company won't comment publicly on that because it is in a quiet period.