MorningWord 11/7/13: In the lead up to today’s Twitter IPO it has been nearly impossible to speak of the company, the valuation, the growth opportunity and even the mechanics of the deal and not speak of Facebook’s now infamous May 2012 public offering. I suspect Finance majors will be studying the botched FB deal for years to come. Goldman Sachs, the lead underwriter of today’s TWTR deal, and the NYSE who won the listing, have a fairly fresh “Do Not Do” playbook from Morgan Stanley and Nasdaq, who by all accounts miss-managed the FB offering. It is my sense that the TWTR is likely to go off without a hitch, at least from an operational standpoint.
The opening print and where it goes after that is another story all together. But let’s be clear, there has been little drama in the lead up, aside from the fact that the investment community and the financial press are in universal agreement that the $15-$30 billion market cap that the company will likely have at some point this morning is a bit ludicrous for a company that is expected to lose money for the next couple years, and like FB at the time of its IPO, has not really proven its revenue model. There is one big difference in my mind though – in the weeks leading up to the FB deal, the lead underwriter’s own analysts cut revenue estimates on the social media company prior to the deal, and those “special” investors who got the wink wink nod nod pulled back on their interest and caused the deal to fail. In hindsight, the size, the pricing, the mismanagement of the offering, the sketchy inside downgrade and general irrational exuberance doomed the the deal, as Henry Blodget of Business Insider famously labeled it in the days prior to the FB IPO as “Muppet Bait”.
TWTR will not have this problem, at least not for a few months when they report Q4 earnings in January or February. But the stock will be subject to what has been an increasing loss of momentum by tech high-fliers and runs the risk to becoming the “poster-boy” for the momo stocks (move over TSLA, you were so summer 2013) . By all accounts, the allocations on the deal are going to be very tight. Speaking to some people who allocate such deals at competitor banks to GS, they suggest that of the 70 million shares being offered on the IPO, probably 30 -40 accounts will get close to 50% of the shares. Those big mutual funds are not likely to sell a share. Actually those 30-40 accounts will then give GS (or the other co-leads) aftermarket orders to buy at least the amount of shares they are allocated, which should help absorb the stock that is flipped by smaller hedge funds that get their small allocations and then take the money and run.
Given the fact that the deal is one fifth the size of FB’s offering, there should be great institutional demand and I would be very surprised if the stock does not close tonight above $35 after its $26 pricing last night. The deal will obviously work, but the extent of the stock’s ability to levitate at what will be new heights for Web 2.0 valuations will be in the hands of you, the retail investor and how much risk you are willing to take to own the $1.8 billion money transfer from institutional investors to Twitter’s treasury that’s all but completed. Now, it’s all about pure animal (hopefully not muppet animals) spirits.