Twitter IPO Logic: Selling Stock Cheap A Success?
Did Twitter (TWTR) just get screwed by Wall Street? The IPO on Thursday was awfully successful by standard definitions, having nearly doubled investor fortunes as the share price shot well over the $26 offer price. But we can now see that Twitter just sold stock for $1.82 billion that was worth – yesterday, at least -- roughly $3.15 billion. It sure sounds like they got duped.
Certainly, the first day trades made Twitter’s investment bankers and their friends very happy. They bought the shares from Twitter at $26 and many flipped them for between $44 and $50. The shares closed at $44.85 Thursday, after opening at $45.10, up 73% from the offering price. Surely the champagne flowed at Goldman Sachs Group (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS) Thursday night.
Twitter itself made zilch on that spread. While a high share price is generally good for Twitter’s existing owners, which includes management and others, selling itself short before open trading began just made others rich.
The Twitter folks may be happy enough that the shares popped on day one. The markets expect a jump right out of the gate to signify a successful IPO, and they can be brutal on stocks that don’t deliver. Remember Facebook’s (FB) launch? Facebook shares closed 23 cents above its $38 IPO price, and that IPO is still referred to as an epic flop.
It’s ironic, however, that this definition of success – the one that demands that new shares are heavily underpriced -- is set by the people who stand to benefit most from those rules. There is no Wall Street mindset that believes it should make $4 a share when it could make $20. Why should a banker advise a client to sell him and his favorite clients something for $40 when he can convince that client to sell it to him for $26?
There’s always the possibility that investment bankers are simply not very good at appraising companies. Perhaps they really were surprised that on opening day, investors paid double or more what they did for Sprouts Farmers Market (SFM), Noodles (NDLS), Benefitfocus (BNFT) and Potbelly (PBPB). Those are all 2013 IPOs. A sample from 2012 includes Annie’s (BNNY) up 89% on opening day; Protolabs (PRLB) up 81% and Yelp (YELP) (up 64%). Underwriters miss on the downside too, but it’s harder to find such spectacular numbers in the overestimates.
Bloomberg reported late Thursday that Twitter’s underwriters took unusually small fees for arranging this IPO. With Thursday’s trading profits, we bet those underwriters are counting big bonuses now anyway.
Investors interested in Twitter now shouldn’t read too much in the “success” of its first day of trading. As that chart above helps illustrate, first day trading pops are rather meaningless in the long run. And as we’ve said before, smart IPO investing by people who are privileged to get pre-trading shares often means waiting a few months for the giddiness to shake out. There will be time, too, to subject the stock to actual equity research tools and see what it's worth on a more rational basis.
The Twitter folks may be celebrating, too, now that the stress and uncertainty of Day One is behind them. But if I were Twitter, I’d be rather mad at my so-called advisors. There’s a whole lot of money sitting in the pockets of well-connected investors who got IPOs shares before trading started, and the quick profits could have been in mine.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.