Variation of the Pandora corporate logo.
Was Pandora's IPO share price Morgan Stanley's effort to make up for a larger scam? (Photo Credit: CC BY-SA/Ross A. Reyman/Flickr)

Online music service Pandora had its initial public stock offering today, and in the middle of the profiteering, Dan Primack of CNN Money suggested that the bankers responsible for the Pandora IPO may have scammed the company. Joe Nocera of the New York Times insisted the same thing happened the month before with career website LinkedIn’s IPO. Pandora shares closed today barely above their IPO price.

Morgan Stanley rewarded key investors at LinkedIn’s expense

Nocera alleges that Morgan Stanley and Merrill Lynch – the two banks responsible for the LinkedIn IPO – intentionally under-priced LinkedIn shares heading into the IPO. After gauging market demand, LinkedIn was priced at $45 per share. The company managed to sell 7.84 million shares of stock, earning $352 million by the end of the day, and the bankers made 7 percent.

That sounds great for a relatively small company like LinkedIn, which made less than $16 million in profits the year before, writes Nocera. However, when LinkedIn started trading on the New York Stock Exchange, it opened at $83 per share. By midday, the share price had climbed to $120, and by close of day, the price was $94.25. The bankers had already been able to steer their preferred clients into shares at $45 a pop during the IPO, however. It is highly likely that these same clients sold when the price hit $120 and pocketed the tremendous dividend.

No doubt, Morgan Stanley and Merrill Lynch weren’t surprised by the turn of the market. Investment banks are paid to understand how the market will react. Thus, as Nocera suggests, the LinkedIn IPO was quite possibly a scam designed to feed preferred investors, rather than the client company.

Pandora IPO: Reversing the scam?

Morgan Stanley was also responsible for the Pandora IPO today. Primack wonders if the bank was attempting to make up for the LinkedIn scam with their actions. Morgan Stanley priced Pandora’s IPO shares at $16 each, which was higher than expectations. Shares opened at $20 and quickly exceeded $25 but settled in by the end of the day at $17.42 per share. The 8.88 percent “bump” was less that the standard 15 percent investment bankers promise IPO clients.

A troubled U.S. economy and worries about the financial instability of Greece kept the Dow down, but Primack insinuates that if Morgan Stanley knew how to manipulate pricing with LinkedIn, how could it suddenly lose its touch with Pandora? The CNN Money scribe’s educated guess is that it was a “make-up” for the previous “scam,” and the Pandora action could have been an effort to appease the venture capitalists at Greylock Partners, who happened to hold pre-IPO stock in both LinkedIn and Pandora.

Financial News Online on the Pandora IPO

Sources

CNN Money: http://finance.fortune.cnn.com/2011/06/15/did-morgan-stanley-scam-its-clients-on-pandora/

Graylock Partners: http://www.greylock.com/

New York Times: http://www.nytimes.com/2011/05/21/opinion/21nocera.html?_r=2

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