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LinkedIn Connects With A Big New Convertible Bond. Is Netflix Tuned In?

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This article is more than 9 years old.

Mark Twain supposedly once said that history may not repeat itself, but it rhymes.

We like rhymes because they satisfy our need for resolution and closure. And in an interesting way, the convertible bond market is getting closure today.  At least that’s how I see it.

Back in February, Netflix came through with an outstanding earnings report. The stock rocketed-from 333 to 388 just like that. Within an hour or two of the report I was calling, in this space, for the company to raise a lot of money with a new convertible bond issue.

Convertible bonds let companies monetize their high-flying stocks without shooting down the plane. They create a new, more sensible avenue to invest in big growth. Get it right? A triple in the stock means a double in the convertible, no disgrace there. Get it wrong? As long as it’s not really, really wrong—like Enron or GM wrong—you get your money back, with a sliver of interest.

Netflix needed to raise money. It did, but it did so with a traditional bond. 5 3/8% interest for 10 years, nothing really wrong with that. But the company could have done better. It could have raised money nearly interest free, maybe not for 10 years but at least five and probably seven, and the only catch would have been giving up some stock 40-50% above a big new all-time high.  Having been forced into selling some really cheap stock a few years earlier, and having given away the store in a private convertible bond then to boot, Netflix’s directors apparently wanted nothing to do with an equity-based financing, even if it made all the sense in the world.

Roll the calendar ahead nine months. Comes now the social-networking company for business, LinkedIn . I make no bones about it. I love LinkedIn. I’ve been using it ever since a friend I first met on a horse-racing trip to Kentucky eight years ago told me about it.  LinkedIn is a remarkably effective networking and career-management tool, a perfect fit for today’s economy. I use it every day.  It’s been invaluable in building my convertible research firm.

But now I love LinkedIn even more. The company announced a $1.15 billion convertible deal Tuesday after the close. It’s the deal Netflix was supposed to do. By the way, it’s the deal Netflix still can do—as luck would have it, Netflix has taken the scenic route to almost the identical stock price it had in February after that earnings report.

LinkedIn picked the right day to announce better-than-expected earnings last week. The market was rallying back something fierce and took the company along, setting a higher watermark than we might have seen on an ordinary day. And to the company’s credit, it hasn’t messed around. It’s taken what the market gives with a smile. IPO at $45 in May 2011, follow-on at $71 six months later, a big follow-on at $223 nearly two years after that. And now, following a rocky year, the stock is finally back above that $223 level. How do you keep with tradition and sell more stock at a much higher price than last time?

Simple. You do a convertible.  And if you’re a big company like LinkedIn, with a big market capitalization and no debt, the convertible will cost you next to nothing—maybe nothing—in cash interest.  Meanwhile, LinkedIn won’t be issuing stock, according to the preliminary terms, unless the stock gets at least 40% above its current perch. Call it 330-ish.

And what’s more, LinkedIn is actually going to cut the kind of side deal that’s become almost customary in big convertible issues.  It will use a portion of the deal to buy back stock—or, if you want to be technical, to enter an option trade that has the joint economic effects of buying back some stock now and raising the effective conversion price of the bond to something more like 400.  This “anti-dilution” step comes at a cost, but trust me: it’s a very reasonable cost.  This is very cheap and very smart financing by a very smart company.

To my friends at Netflix:  I love your service.  Without you I couldn’t have binged—twice--on Breaking Bad, the greatest show ever.  But as long as you guys don’t raise money with a convertible, you’re pulling a Jesse Pinkman, throwing cash out the window.  Thanks in part to Mark Cuban, your stock has already regained half the ground it lost recently. It’s in the right spot. Heck, with a convertible, you can effectively issue stock higher than it’s ever traded—above 500, in fact. Do I need to spell it out any more?  Heck, don’t ask me. Ask your buddies over at LinkedIn.  I’m from the East Bay, so my South Bay geography’s not what it might be, but I’m pretty sure you guys know each other. Grab a beer or two and talk convertible bonds.  Yeah, Mr. Twain! Yeah, finance!