Price Cost Twitter Cash but Gave It Credibility

http://dealbook.nytimes.com/2013/11/08/did-twitter-leave-money-on-the-table/?nl=business&emc=edit_dlbkpm_20131108&_r=0

by JumpCrisscross • 13 years ago

31 24 13 years ago

dealbook.nytimes.com

001sky• 13 years ago

This is an interesting theory. I'm not sure I understand it fully. But since the company pared back its offer (and likely will sell again via 2nd offering) it certainly is good to leave the impression that some 'value' will be left on the table for public shareholders. Whether or not its all a mind and pr game, versus something more actually tangible, is perhaps beside the point. And I suppose that is what the title is meant to convey. Here is one critical bit of context:

But no Twitter insiders sold stock as part of the offering, so their shares, valued at as little as $17 just a week ago, are now worth more than $40 a share. With the shares still at least 60 percent above the initial offering price, Twitter’s insiders must feel rather pleased with how the offering was executed.

chrislipa4• 13 years ago

Maybe I'm fundamentally missing something, but I have a very hard time seeing why Twitter should care all that much about how much their stock 'pops' at open. Sure, they should care deeply about the price it settles at, because that's how they'll attract talent in the future and bases how they'll price future offerings, but the actual amount of pop itself? I don't see it.

This gem from the article:

Should a stock offering maximize value for the companies selling shares, for the investors looking to gobble those shares up or for early employees and funders? And why are investors buying the shares — because they love the company’s fundamentals or because they sense a good deal?

This is a ridiculously false dichotomy. In any efficient market, sellers are trying to raise the price as far as the demand will bear, and buyers should be willing to purchase up to their estimated value of the company, taking into account their risk tolerance. Price should be a tug-of-war between these actors.

The way I see it, there's only two possibilities:

1) Pre-IPO Twitter thought there was a realistic risk of not fully selling the shares they put up if they raised the price.

2) Twitter purposefully got less money in a fair market trade than they could have.

And (2) seems totally insane to me for a rational actor. (1) seems plausible; apparently these things are hard to price.

pbreit2• 13 years ago

I don't understand what you're asking. The IPOing company cares about the pop because if it is big, it means they could have gone at a higher price and pocketed more cash. The "optimal" pop is probably around 10-30% given that pricing is difficult and you want to make sure there's a bit of a rise.

Auctions sound good in theory but don't work very well (see Google). You generally want some banks selling the crud out of the offering and committing to the company.

chrislipa4• 13 years ago

But that's a counterfactual. Once the pop occurs, the company could not have gone with a higher price and pocketed more cash. A rational actor should make the best decision they can make given the information they have at the time, place their bets, and take their chances. The article clearly made it seem like having a pop (as differentiated from having a higher stock price) was a favor that Twitter was doing investors, and that somehow this favor would be repaid by market at large via some mechanism that's totally mysterious to me. I'm honestly really baffled that this meme gets repeated so much, and I'm open to explanations.

Dutch auctions do sound good in theory, and I'm aware of what happened with Google's: a 17% pop, which left some money on the table, but much less than Twitter did. Google's stock did abnormally well in the months following, but it's hard for me to divine how much of this had to do with the IPO mechanism. In any case, I think a sample size of one is probably not enough to draw much of a conclusion one way or the other.

phillmv• 13 years ago

One of the articles listed below quotes the notion that without a pop the stock "looks bad", which sounds insane to me.

It sounds like an a posteriori justification of the status quo for playing on Wall St, to me.

I recall a lot of hand wringing in the press when FB IPO'd but their market making bank wasn't able to score anything out of it precisely because it was accurately priced. The more I read about this, the smarter, more incredible of a negotiator I think Zuckerberg is.

MichaelGG2• 13 years ago

Twitter and its banker, Goldman Sachs, widely miscalculated demand for the stock
Those who were able to secure an allocation of shares recognized an instant 73 percent gain

Doesn't sound like miscalculation.

I am confused why this seems to happen, though. I'd have to assume that the people at Twitter have access to more information and advice than I could possibly hope to understand. Even so, they choose to not use an auction or anything, but let GS make a huge amount for themselves and choice customers. There must be some reason these companies' allow their IPOs to be managed that way.

I also do not quite understand how "winning the good graces of the market" means anything. Unless they're suggesting that Twitter is planning on tens of millions of more shares in the future, and hoping a good IPO leads to even higher "long term" share price.

In the case of FB: If FB stock had stayed at $20 or so, would that really affect FB? It'd be less than fantastic for employees and other shareholders that had options or shares, but would it hurt FB the company itself?

prostoalex2• 13 years ago

Investment bankers' job is to allocate tens of millions of shares. Individual investors trade in small 100-1,000 share lots.

Having an individual trade close at $50.09 doesn't mean you'll be able to move tens of millions of shares at $50.09.

chrislipa4• 13 years ago

But it sort of does imply that. Here's the reasoning -- There's a liquid market of a lot of shares trading hands at $40+. Anybody who bought a share at $26 knows he or she can sell today for $40+. To a first approximation, choosing not to sell at $40 has roughly the same effect as choosing to buy at $40. If the price is supported at $40+, that's at least very suggestive evidence that enough buyers could have been found at that price in the first place.

twotwotwo• 13 years ago

Sounds good to me; it seems quite believable that major investment banks would use their positions as trusted advisors to encourage IPO'ing companies to use strategies that benefit the bank. That's what happens you use interested parties as your experts.

The press also seems to cover the stock market mostly as a casino, not as a money-raising or social capital-allocation mechanism. So stock rises==good, drops==bad. So the FB IPO "failed," even though the so-called failure mode actually raised Facebook more cash to expand its business than most alternative outcomes would've.

rhizome3• 13 years ago

Does it have to be anything more than a kickback?

MichaelGG2• 13 years ago

Well if you and I are thinking that the people running Twitter are dumb and left a billion dollars on the table, there may be more to the story.

nsiemsen2• 13 years ago

The Epicurean Dealmaker wrote a fantastic post a while back, and I will endorse but not repeat his entirely correct explanation of why IPOs are supposed to price at a discount; just go read it.

http://epicureandealmaker.blogspot.com/2013/09/go-ask-alice....

Tarang• 13 years ago

I don't get these articles. Using Facebook as an example is terrible! Just because Facebook didn't go up on its first day as much as twitter did doesn't mean they left money on the table.

Twitter IPOd at a much much higher price than those traded on private markets before the IPO. Facebook on the other hand went to almost the same price as on private markets. [1]

nsiemsen2• 13 years ago

This article [1] says that Twitter shares traded as high as $32/share on private markets prior to the IPO.

[1] http://america.aljazeera.com/watch/shows/real-money-with-ali...

marvin2• 13 years ago

So, what does people here think about Twitter's valuation? Aren't they basically a 22 billion dollar advertising company? I am agnostic in this regard (although perhaps a little skeptical), but I was wondering what others think.

lvryc• 13 years ago

Google is a 350 billion dollar advertising company...

marvin2• 13 years ago

Yes, but then again Google is the world's biggest Internet advertising company. So I don't think that's the most apt comparison.

borplk• 13 years ago

As Twitter is becoming more popular a Twitter handle is becoming increasingly more like a phone number or email address and just like a phone number or and email address I wouldn't want it to be tied into one particular provider.

pedrocr• 13 years ago

So according to the Times entrepreneurs should spend years building companies and VCs hundreds of millions funding them so that when (and if) they've built a successful company that can be IPO'd they can take 5% of the total market cap of the company and give it to some Wall Street insiders to get some "credibility".

Bankers are same folks that argue that they are adding efficiency to the market and thus deserve a big paycheck, and yet their IPO pricing maxim seems to be "guess a number and just make sure it's below the actual value so you don't anger the market". When Facebook tries to price it right (using the greenshoe to adjust) or when Google tries to do a reverse auction they get up in arms. Does anyone actually have a good argument for leaving in a margin for the investors in the IPO? This article's only attempt seems to be this:

"But it is also in Twitter’s long-term interest to remain in the good graces of institutional investors that believe in the company and will continue to invest. After all, based on fundamentals alone, it was hard enough to justify valuing Twitter at $18.3 billion, based on $26 a share, let alone $31.8 billion, based on $45.10."

This to me reads like "they need to bribe the market so they'll keep putting money in Twitter".

rhizome3• 13 years ago

In simpler terms, it's the price of admission.

Price Cost Twitter Cash but Gave It Credibility

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