The Twitter stock IPO is going to happen - it's no longer a question of if, but of when. The company is the latest social media concern to go public, and investors and commentators alike are looking forward to the festivities.
It remains to be seen whether or not Nasdaq can avoid the issues that it ran into with Facebook Inc. (Nasdaq: FB). That IPO was one of the biggest in history. The company had a market cap of $104 billion, unprecedented for an IPO.
But the offering was beset by... nearly everything that could go wrong with an IPO. The exchange suffered a computer malfunction that misplaced somewhere between $10 and $20 million worth of share orders. There were allegations that underwriter Morgan Stanley (NYSE: MS) offered too many shares at too high a price.
Although it's impossible to tell for sure, as the JOBS act allows firms with less than $1 billion in annual revenue to keep IPO details confidential, the smart money says that Twitter will open lower - much lower - than Facebook did, in order to allow the markets to regulate themselves and for shares to appreciate according to market forces. It remains to be seen whether or not this is a wise move, but it's undeniably more level-headed.
Who Wins the Most from Twitter's Stock IPO
However the Twitter stock IPO fares, the biggest winners will be the early investors, the angel investors, and the people who started the undertaking. The New York Timestells the story of Twitter founder Evan Williams passing the hat around among some of Silicon Valley's many financiers as he was starting out. He lit upon Dick Costolo, who agreed to put up $25,000.
Six years later, Dick Costolo is the chief executive officer (CEO) of Twitter. The New York Timesestimates Costolo's $25,000 stake to be worth more than $10 million now, not including anything he's entitled to as part of his CEO compensation. It's a near certainty that Evan Williams himself is set to be America's newest billionaire.
The underwriters usually do well, too. In Twitter's case, Goldman Sachs is taking the lions' share of the underwriting. According to Bloomberg, this will put Goldman on track to be the top underwriter in the United States for the first time since 2009. JPMorgan Chase & Co (NYSE: JPM), Morgan Stanley, and Deutsche Bank AG (USA) (NYSE: DB) will all take on underwriting duties - and profits - as well.
After all these categories of people get their cut, it's next to impossible for individual retail investors to pick up the very best IPO shares. The system works against smaller investors, by design if not intention.
But maybe that's not a bad thing.
The truth is that there have been plenty of "hot" IPOs that have fizzled, and in the worst cases they've burnt investors.
Facebook is a great example. The problems with the IPO, the valuation and technical issues, were so bad that shares have only recovered in the last few weeks, after a year in the basement. The offering price was $38 per share in May 2012, and it was August 2013 before they hit that level again. The shares hit a low of $18.80.
Facebook Wasn't the Worst IPO
Facebook is probably not going anywhere anytime soon, even if it's not a great investment. It has the mindspace to stay relevant, and its advertising model is a moneymaker, capturing nearly 16% of global mobile advertising revenue this year.
There have been other IPOs that went worse, much worse. Here are three of the absolute worst.
Vonage Holdings Corp. (NYSE: VG) had a notorious, comically bad IPO. The Internet communications company had ubiquitous advertising and a decent product, Voice over Internet Protocol, which essentially offered phone calls for free or at a low cost over the broadband connections. Vonage raised a very tidy $531 million on the first day. The first day was the best day, and for all intents and purposes the last day. Over the week that followed, the company lost something like 30% of its value. Analysts for MSNBC said the firm "may never be profitable." Vonage won the dubious honor of the single worst trading day for a company in 2006. Shares that debuted at $17 per share are now worth about $3.
Hertz Global Holdings, Inc. (NYSE: HTZ) had more or less everything going for it. It was a household name, one of the world's leading rental agencies with hundreds of outlets across the globe, and it offered a necessary product for most travelers. But, in 2006, the private equity firm who owned the company took on close to $3 billion in debt - not necessarily the best circumstances for an IPO. Even worse, the private-equity barons constructed special payout vehicles to dole out $1.4 billion to key executives just a few months before the IPO. Thus was the IPO met with... a total lack of enthusiasm and extreme levels of suspicion. Investors just couldn't be conned into investing in a debt-ridden, thoroughly unimproved issue. Shares started trading at $15 and declined sharply over the next four years, until the company radically restructured and expanded.
In 2005, The Go Daddy Group, Inc. was the biggest ICANN-accredited Internet domain registrar on the Internet. It was consistently in the Top Three web hosting companies as well. Its advertising was a Super Bowl fixture, famous - or infamous - for featuring scantily clad women in provocative situations. On the surface, it seemed that Go Daddy would be perfect for a mid-decade tech IPO. Except that it wasn't. Go Daddy radically overestimated enthusiasm for small- and medium-sized technology offerings. Remember, barely five years previously, the "dot.bomb" bubble, driven by fantastically overvalued technology companies, wiped out $5 trillion in market value when it burst. The investing public was once-bitten, twice shy in this case. The IPO was canceled due to "market uncertainties," the understatement of the year.
So, as we await the fireworks attending the Twitter stock IPO, don't feel too bad if you can't get in on the shares early. You just might have been done a favor.
For the full story on IPO investing, and how not to get burned, click here.
The New York Times:
The Payday at Twitter Many Were Waiting For
The Los Angeles Times:
Twitter Drawing on Lessons Learned from Facebook IPO