
Price Cost Twitter Cash but Gave It Credibility - JumpCrisscross
http://dealbook.nytimes.com/2013/11/08/did-twitter-leave-money-on-the-table/?nl=business&emc=edit_dlbkpm_20131108&_r=0
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chrislipa
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.

~~~
pbreit
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.

~~~
chrislipa
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.

~~~
pbreit
I still don't really understand what you are wondering. If we're talking about
post-pricing, then, yes, Twitter can't make more money (actually it can
because of the over-allotment which of course would only get exercised if the
price goes up; another reason to hope for upward movement).

Twitter was clearly playing the whole thing conservatively and aagreed to a
price that was probably low (hindsight to some, foresight to most).

There's some incentive so appease the banks as they historically do play a
meaningful role going forward as related to M&A and fundraising.

The Google IPO was lousy not because it only popped 18% but because the
auction format severely depressed the whole thing. Google inexplicably got
pretty much the same result as Twitter ($1,8b on a $23b valuation) despite
being an order of magnitude more impressive (I like Twitter).

------
pedrocr
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".

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

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nsiemsen
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....](http://epicureandealmaker.blogspot.com/2013/09/go-ask-alice.html)

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MichaelGG
>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?

~~~
prostoalex
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.

~~~
chrislipa
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.

~~~
prostoalex
That $40 floor exists once the market starts trading and there's external
confirmation and safety in numbers.

The IPO process is more or less bankers emailing clients asking "Hey, want to
buy this brand new company at $26? How about $32?" You essentially have to
make a decision without information on how other buyers behave, which forces
conservative behavior.

~~~
chrislipa
Yea, I get it. I'm just saying it's suggestive, not conclusive.

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marvin
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
Google is a 350 billion dollar advertising company...

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

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Tarang
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]

~~~
nsiemsen
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...](http://america.aljazeera.com/watch/shows/real-money-with-
alivelshi/Real-Money-Blog/2013/11/6/twitter-set-to-
gopublicthursdayyetsharesarealreadytrading.html)

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borplk
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.

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001sky
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._

