Twitter's investors (who have plowed hundreds of millions in to a loss making company) decide to sell some of their stock at $26/share (after consulting with banks to arrive at this price). This will make right the losses they've experienced so far and pass the problem down the line. The banks buy at $26 and then immidiately flip for north of $40. This lines their pockets and passes the problem down the line once more to joe public.
End result: investors in loss making company cover their investment and make some profit, banks make some juicy profit for facilitating the game, joe public swallows the hype and makes the whole dance possible by eventually footing the bill.
Edit 1: thanks everyone for the thoughtful replies. I guess I can only continue to feel cynical if I believe that the original investors did all of this knowing full well that twitter never has a chance of living up to its valuation i.e. they just wanted to cover their losses, make a nice profit on top and punt the problem down river. The alternative is that the investors do honestly believe in the future profitability of the company and have decided now is the time to take some well earned profit as a reward for taking the financial risks in getting the company to where it is today.
It's going to take me some time to make my mind up as to which of those two scenarios I believe.
Edit 2: still difficult to understand why the banks have managed to come away with doubling their money though.
Edit 3 (final one!): See https://news.ycombinator.com/item?id=6691157 for a nice reply that seems (to my clearly very untrained eye) to make the investors motives a little less cynical.
The transaction here is between risk takers (venture capitalists and investment banks) and risk pricers (people who buy stock). Nobody is getting "ripped off" as long as everyone is following the rules set down by the SEC.
Investors put money at risk. You know that because you've been here on HN a couple of years and no doubt read the <foo> is shutting down. stories. For each of those there is usually one or more investors who have put in thousands if not millions of dollars who get anywhere from $0 to some fraction of their investment back. Sometimes, their investment 'bet' pays off and they get back multiple times their investment. The trick is you blend all of those $0 and multi-X returns and you get their "effective" return.
"Joe Public" and by that I assume you mean an unsophisticated retail investor (they aren't investing anyone's money but their own). Can achieve a similar result by buying "shares" in a fund managed by a banker. When folks ask me where I would put some extra savings I tell them I've been very pleased with the Vanguard funds. You make more than then .8% return that a Bank savings account pays, and your risk is relatively moderate (but if it is not zero like it is with the savings account). But this unsophisticated person should never be investing in an IPO stock.
The professional managers who invest in an IPO stock may have hundreds of millions of dollars under management. They spread some of those over a number of IPOs as a way to provide 'long kicks' (which is that the stock is held for a long time and the success provides a large return many years later). Clearly they aren't putting their kids college fund in there. And most of the other dollars in their fund are on much 'safer' sorts of things, like Coca Cola or Alcoa.
So this is the 'cycle of life' for many new tech companies, and if these investors in Twitter do well their Venture Funds will have a reasonable rate of return, and more rich people will give them some of their 'excess' funds to invest in other tech companies, and you and I can go get some of that by pitching them a great team and a great idea.
So for the 11 times smart people came to them and they gave them millions and got nothing back, this 12th time they got a lot back. Nobody gets hurt as long as the people who don't know what they are doing stay out of the game. That didn't happen in the late 90's lets hope it doesn't happen again.
I think we all understand the deal with investors who get in early and invest money in something that has a chance to fail will make money if it succeeds.
The IPO is a suckers game. It says me as an insider value the company less then you as an information limited outsider. If Twitter is worth $50 bucks a share why were its investors willing to part with their stock for $26 a share only yesterday? Sometimes you can profit even in the presence of this information disparity because the company will outperform its expectations, but now you're 1 out of 144...
<rant over> :-)
EDIT: I think a solution to that is perhaps a combination forcing companies to go public sooner (limit IPO valuations or spread the share sale over longer periods), combine with more limits on insiders, more and earlier disclosure and perhaps combine that with a more KickStarter like model - eliminate the middle man.
As for the insider vs outsider. In order to issue an IPO, a number of stocks are agreed to be issued. These stock either come from the company issuing more shares and diluting the value to current stock holders and the company receives the money from the new share purchase, or the stock holders offer up some of their stock to be sold in which case they receive the money. I believe is usually mix of the two. The current stock holders don't offer all of their shares up. Just enough (I believe this is set by the SEC) to enter the market.
The underwriter assumes a large risk and for the portion of the stock that goes through them to market, they are paid the $20 difference ($26 to $46). As well they facilitate the actual sale of the shares. This is not an easy task (again see the technical issues with the Facebook IPO).
So in the end the 11 rounds of investors get $26 for some of their shares, in order for the rest of them to be worth $46 or now $50. They are also now allowed to sell those remaining shares on the open market. Something they were not able to do before the IPO.
No one is getting screwed here. There is a very big pie, and everyone, from the first investor to the undrewriter, gets a piece.
That said, most of the money still does end up in the company which can use it to build its business. The process isn't completely broken. But it's very inefficient.
If they still made money, what's the risk? I don't consider "X chance of making 100% return, (100-X) chance of making 10% return" to be much of a risk.
Facebook went the other way. They tried to grab every last penny on the table. Their stock underperformed post-IPO which isn't good either.
You can put Twitter in an overreaction the other way - they didn't want to leave money on the table (raising the shares to 26) but didn't want to be too greedy either.
The bankers get paid to line up supply and demand. They may be helped by being an oligopoly, but right now the market isn't set up to cut them out of the loop.
But, why was it bad for Facebook? Sure, their stock was below the IPO value for almost a year, but employees almost certainly had their options priced well below the IPO price, right? What other ways can a slightly lowered stock price hurt a company in the year after an IPO? Genuinely curious about this.
Moreover, there is a mental dynamic when recruiting. A steadily appreciating stock is a helluva recruiting tool.
Internally someone starting the week of IPO might have received his stock grant at that week's price might not feel particularly upbeat when the stock price is later cut in half. There's always some churn and renegotiation going on at the companies whose stock price suffers significantly, and that makes it harder to concentrate on execution.
Also - if every company flopped post-IPO, the IPO market would die. That's not Facebook's immediate problem, and again "doing the right thing" isn't worth leaving $20/share in the hands of flippers.
Could you elaborate? I thought the dutch auction was a good way to maximize google's share of the pot (by taking money away from well-connected people who received shares at the IPO price). Looking back at historical reports it only "popped" 17% ($100 from offering price of $85) compared to twitter's 73%.
I view the bankers like real estate agents. Many are worthless, but a good real estate agent can raise the price you sell your house for much more than the 6% in fees they charge.
This is a good example of a situation where you should stay close to what you know and stop thinking you can outsmart people who make a living a certain way everyday and know as much or more than your advisers. And definitely more than "you" (meaning the google guys) who made decisions based on things they read or what they were advised as opposed to having an actual seat of the pants feel for why something is done a certain way. And the pros and cons.
There is a reason, you know, why people cooperate with the "mafia" and pay the vig and play the game. Is it right? No. But stick to what you know and stop thinking you can outsmart others out there who do something for a living and have established procedures and actually do add value in a system that essentially works. So others take their cut.
The jury is still out on Facebook. Their IPO could hurt them getting money in the future, but maybe not.
It's not the underwriters who get paid when stocks double, it is the people they allocate the stock to.
As Warren Buffer says, in the short term the stock market is a beauty contest. So yeah, Twitter is very beautiful today.
The idea behind the stock market is to have a way for businesses to raise money for expansion (other than getting a loan from the bank) and investors buying into the future profit of this expansion. This is capitalism and it's great. It has turned into this casino pumped by easy money with wild up and down swings where any correlation to the soundness of the business, its prospects or performance are purely coincidental.
The "insider" doesn't have to compete with as many people for an ownership share. A small sampling of "insiders" does not efficiently price a security the way an offering to the greater market does.
This idea that capital markets are designed to screw over the little guy is amusing to me to see HERE on THIS WEBSITE of all places.
You act like the market works like Amazon.com where these scary "insiders" list $45 price tags on things. In reality, people are creating BIDS. That's how it works.
To me an IPO is very much a conflict of interest situation with asymmetry of information. There are laws to govern this but there is a huge gray area.
Once a company is public it's a little different...
In my opinion capital markets have been getting more broken in many ways and have been favoring the big guys over the little guys in many ways. I say that as someone who invests in the markets, have benefited from stock options and pretty much seen things from many different angles. In the last 15 years capital markets have failed to deliver the economic growth and the gap between the rich and the poor has widened.
You're obviously entitled to your own opinion, and certainly IPOs carry much risk. That "insiders" get made liquid is not, IMO, one of them. Somebody who invested in GOOG on day one would've made over 10x on their money today. Somebody who did the same in ZNGA would not. It's obviously very risky, with potential for commensurate reward.
I'm not sure why you think the markets have "failed to deliver the economic growth" over the last 15 years, or that it's somehow their job to "deliver" economic growth. I think us "little guys" who have invested in the market in that time have done very well on balance.
I'm not one for long back and forths, so feel free to have the last word if you'd like it. I replied initially because I'm very much turned-off by the save-people-from-themselves philosophy.
You quoted Buffet, I'll quote Jesse Livermore:
"t was never my thinking that made the big money for me, it always was sitting."
If you think the "little guy" is screwed over by the "big guy", become a buy-and-hold investor. There's little way to be screwed there. Spread your bets out--diversify--and buy and hold. When it comes to trying to time the market or play ER or day trade, you're right, it's hard for a retail investor to make a buck. So buy and hold and let the stock market help you accumulate wealth the way it's done reliably for over a hundred years.
One answer is there are a lot of people who just want to get their billion out. Or million. Or hundred thousand. They are largely undiversified. They are selling to diversified owners who are less impacted by day to day price shocks.
A second point is that the underwriter is paid to keep the shares liquid on the market at least for the first 30 days depending on the contract deal. It means that the underwirter will need to put himself on the buying side or the selling side everytime someone want to buy/sell his shares ... this is a huge risk again just look at the volume of the share deals everyday on the market to see what kind of liquidity the underwriter need to keep ready to play ...
I agree with you that this don't create value for the economy out there but it is necessary to keep the wheel rolling ...
On every trade two speculations are made, I don't see how bringing in unsophisticated retail investors would help with regard to price discovery.
Looking at it another way: the whole thing is intrinsically speculative. Starting a company is speculative, investing in a company early on is speculative, IPOing is speculative, buying publicly traded shares is speculative. It's all speculation in a never ending quest to divine what a company's (or idea's) true value is.
The more I go down the rabbit hole trying to think about and understand all of this, the more I find myself ending up here: http://en.wikipedia.org/wiki/Wikipedia:Getting_to_Philosophy :D
" it just appears to boil down to a numbers and sentiment game that
doesn't seem to be a rational way to determine a company's "real" value
at any given point in time"
The interesting question is "What makes this important to you?"
I ask because there is absolutely a rational way to determine a
company's value, it involves analyzing its market, its product, its
ability to grow and develop and the its ability to stay ahead of
others who would try to do the same thing.
Putting the world "real" in scare quotes suggests that there is a
large difference between a value that you came up with internally and
the one being exhibited on the stock market today. This isn't a whole
lot different than the 'SnapChat is worthless' discussion of a few
days ago. It also isn't surprising since different people value things
in different ways. But it is important to recognize that you are not
wrong, if it is worthless to you, it is. And that is just as valid an
assesment of the company as one that thinks it's the best thing since
So why is it important?
When I was 8, I was selling some baseball cards at our yardsale, priced per their trade book value. At the end of the day, I was distraught because the only offers I got were well below the cards' value. The response from my mom still resonates to this day:
"Things are only worth what people are willing to pay"
The only way you can ascribe value is from the point of view any one particular entity (including yourself) at any one particular time. The only way you can see it is when a transaction takes place.
There's nothing wrong with stock markets conceptually, and there are indeed some which are nicely regulated and quite fair.
So, given your bank goes bust in say, one of those recessions the U.S. experiences in greater and greater frequencies, either you lose nearly everything in your 'savings' account as the FDIC doesn't have enough money to cover all of its deposits the bank loaned out for its own profit - fractional reserve banking serving YOU since 1913. OR the FDIC pleads to the Federal reserve to 'give' it money, print it that is, causing massive inflation. Though in that latter case, you get the money first, so get to spend at current prices before the influx of new currency causes prices to inflate.
Though in current times, the solution is that these banks are too big to fail. So whenever they gamble your money to make a profit, yet lose, they get some of those nice big bailouts from the Fed. In that case the banks get to the spend the money first, and everyone else holding USD gets an inflationary hit - again you lose your purchasing power of your savings.
That makes it all a bit less cynical to me since all it means now is that the investors are worth more on paper. They still have to actually sell some of their shares at some point to realise any profit and presumably it's not easy for them to sell large quantities quickly (i.e. they're in this for the longish haul and thus far haven't covered their losses to date with actual bankable money)?
Would have been better in my book if they'd have waited until twitter at least turned a profit before going for the IPO but then I guess why wait if you're only plausible exit is IPOing and the banks are telling you the market will support it.
Anybody who buys TWTR is making an informed decision and expects Twitter to do very well. It's hard to imagine Twitter today eventually being worth the current market cap of $25B. However, take a look at Google as a prime example of success.
When GOOG first hit the market in 2004 it got a market cap of $23B. It was somewhat hard to imagine a web search company ever being worth that much. Today it's at $340B.
Can someone enlighten me how Twitter might earn some steady money?
Think about all of the paywalled news outlets out there. Think about how many journalists tweet their stories to drive their personal brand.
Think about immensely popular twitter accounts and sought after domain experts.
Think about the fact that someone who is very entertaining on twitter needs to leave twitter to ( consult, sell t-shirts, produce media, etc. ) if they want to make money.
Think about how t.co makes it possible for them to track url usage attributable to them.
Remember when micropayments for media was a buzzword?
If you still don't get why twitter might be undervalued. I would be happy to to explain it to you with, charts, graphs and a full research report; for a fee.
If a million people use a link to go to a paywall site, that's awesome - except as of now the data shows that Twitter users don't become buyers as a general rule.
Can they make money? Sure. Can they make money with ads? Sure. Can they make money with massive vertical media funnels? Well...what will make them more successful than Apple, Google, Microsoft and TimeWarner who have all been trying to do the same exact thing for many years?
Not saying they won't...just saying I'd like to see some track record before I buy into an idea that no one has been able to make work yet.
Err.. I'm not sure about Apple or TimeWarner, but Google and Microsoft have been very successful at making display advertising work well.
Check out the IAB 2013 Half Yearly report. Some key quotes:
Display-related advertising accounted for $3.1 billion or 30% of total revenues during Q2 2013, up 8% from the $2.9 billion (33% of total) reported in Q2 2012. Q2 2013 Display-related advertising includes Display/Banner Ads (19% of revenues, or $1.9 billion), Rich Media (3% or $329 million), Digital Video (7% or $676 million), and Sponsorship (2% or $181 million).
Note that they aren't counting mobile advertising as display advertising (even though much of it effectively is).
Mobile revenues continued to quickly gain share, representing 15% of total revenues in HY 2013, as compared with 9% reported in FY 2012 and 5% in FY 2011. First half 2013 Mobile revenues represent 90% of total 2012 Mobile revenues.
Note that Twitter has particularly strong mobile usage.
Many people don't realize that people still pay a lot for "eyeballs":
At 65% of advertising revenues through half-year 2013, performance-based pricing appears to have leveled off, even experiencing a slight decline from its high of 66% for the full year 2012. As a result, CPM/impression-based pricing gained slightly, up to 33% for the half-year, its highest point since 2010.
their demographic targeting is razor sharp, you can target followers of specific users, or people within any of the standard demographics. You can also target people by specific interests.
I think this is the AdWords for branding
I think there's a big opportunity for twitter to be middleman allowing authors to charge for their services. Twitter influencers might get articles for free publicity. But most people would pay to twitter to pay authors proportionately; and if you logged in with twitter on any news site; it's covered.
If I could pay 1 outfit and have it distributed fairly to everyone whose stuff I read... So that I don't have to get a subscription to all of [ nytimes, latimes, chronicle, guardian, bloomberg, j.random.techblogger etc. ] But never got paywalled and knew the authors were getting paid; I would find that a compelling offering. Now Amazon could probably make a play for that position, but they have some structural issues that limit them and twitter has a better story for independents.
Many investors appreciate a blurrier future since it can lead to more upside.
Advertising online is, I believe, in the long run, going to be tricky to maintain as a source of income, even for content-centric sites. For service-oriented sites, such as twitter, I just don't think it's the right approach, especially given a nice API which allows the ads to be bypassed. OK, I'm sure plenty of people will disagree, but it would be really nice for a high profile social network to just try this and see if they can make it work (I know linkedin's model is essentially this, but I see them as a very different beast from the general interest communication juggernaut that is twitter).
But don't take my word for it. Recently the US Treasury conveniently wrote a paper admitting that the Fed was responsible for spurring the asset inflation.
The dollar has lost 97% of its value, according to the Fed, over the course of a century. That was before they were knee deep into the economy 'printing' trillions - having increased their balance sheet by 300% in five years. How can they ever stop printing while the US Govt. runs a $700+ billion deficit? They can't. The outcome is obvious.
The Fed intentionally re-inflated assets, because it's the only gimmick they have left. Once you lower interest rates to zero, there's nowhere else to go but to intentionally try to spur asset inflation and generate a fake wealth effect, which the Fed has done two other times in the prior decades. They use their POMO program, along with mortgage purchases and cheap interest rates to inflate the stock market and the real estate market. It's real simple.
There has been no job recovery. There has been no manufacturing boom. There has been no improvement in the welfare and poverty picture. There has been no improvement in incomes. And we're still missing seven million full time jobs, and millions have fallen out of the labor force.
So why are asset prices booming? The answer to that is obvious as well.
1.) Quantitative Easing is printing money
"This is because when the Fed buys bonds from banks it does so by crediting those banks’ accounts at the Fed with reserves that didn’t exist before. But it’s misleading to call this process “money printing” because it doesn’t actually do anything to increase the amount of money in circulation. In fact, in our monetary system, most money is created by private banks and not the Federal Reserve. When a bank lends you money on your credit card, that’s “printing” money."
They say it's misleading to call it "printing money" because all they do is increase the amount a private bank can lend out. Apparently it's not their fault for putting in the extra reserves, it's the private bank "printing the money."
2.) Quantitative Easing will eventually lead to inflation:
"If the government literally began printing money and started mailing out new $100 bills to citizens, that would lead to price inflation."
Apparently, using their own example above, people getting lent more money and using that lent money is not inflation. The author is purposefully evading the core argument and instead paints a ridiculous definition of inflation (direct inflation). It doesn't take a genius to see that more reserves = more money to lend = more money to spend = more money in circulation.
3.) Quantitative Easing is responsible for recent stock market highs
Point isn't pertinent to the discussion and quite frankly, I don't care. The stock market is driven by people who decide to buy or sell. When more people buy, prices go up.
So, what are your thoughts?
The simpler and more plausible explanation for stock market growth is coinciding GDP and earnings growth. QE should lead to a mild preference against (UST) bonds by lowering yields, but it is dubious that this alone could explain stock market indexes doubling over the same period. Twitter's one-day stock price specifically is idiosyncratic investor behavior and blaming that on QE is absurd nonsense.
In fact, there are almost no serious arguments for why QE should stimulate the economy in any way, except for a small straw, which is that QE might reduce long-term interest rates, and that this drop of long-term interest might induce more people to take out bank loans and increase their spending in this way.
Also, yes, Quantitative Easing might lead to inflation, but this is exactly what people hope for in the first place :-)
And no, Quantitative Easing will not lead to uncontrollable inflation. If loan-driven inflation gets too high, the central bank can simply decide to raise interest rates and stop QE again.
Not the parent but I thought depository and possibly other types of loans were limited by the size of reserves.
As long as the amount of reserves is close to the legally required minimum amount, there is an indirect link between loans and reserves, but its causality goes in the other direction as traditionally believed. When the volume of loans increase, then deposits increase also. Then the banking system as a whole needs more reserves.
If the amount of reserves available were fixed, this would lead to banks bidding up the overnight interbank interest rate. However, after some disastrous experiments in the 1970s and 80s with alternative policies, central bank policy is to keep that interest rate fixed. And that means: the central bank accommodates the banks' desire for more reserves by buying assets from the banking system.
Conversely, banks bid down the overnight interbank interest rate towards zero if there are too many reserves in the system, unless the central bank pays interest on reserves. This is exactly what central banks in most of the Western world want to happen today.
In any case, the story is that the amount of loans made by banks causally sets a lower bound on the amount of reserves in the system. The reverse direction does not hold.
Again, anybody who believes the latter would have to exhibit an explicit mechanism that establishes a reverse causality. There is no such mechanism in the rules (i.e. laws or regulations).
Oh, and if you are appalled because you believe that all this means that banks can just make loans as they please: they can't. However, the limits on loans are set by capital requirements, and for good reason: capital is a suitable buffer against defaulting loans, reserves aren't.
When a bank makes a loan, they simply create a new deposit, say worth 100#. If the reserve ratio is 0.1, and assuming that bank had exactly the required reserves before this operation, then they will have to acquire 10# in additional reserves within a week or two (yes, you read that correctly; reserve requirements are after-the-fact requirement that can be fulfilled with some delay).
More likely, though, the person or company that the loan was made to will use these 100# to pay somebody else, and in doing so, the newly created deposit is transfered to another bank B.
To balance this transfer, bank A must transfer 100# in reserves to bank B. Usually, it will simply borrow those reserves from bank B against an appropriate collateral such as the loan it has made. The profit of bank A from the loan is the different in interest between the interest owed by their customer, and the interest they have to pay in the interbank market to bank B.
At the same time, bank B now has an increased reserve requirement, and they need to get those 10# from somewhere.
As I explained previously, this will lead to the interbank rate being bid up if there are no excess reserves in the system. When that happens, the central bank buys assets from banks in exchange for new reserves (instead of outright buying, a repurchase agreement may be made).
However, banks also have the option to directly borrow reserves from the central bank, at a fixed interest rate.
Is that correct?
Do you work in finance?
Can you recommend any books on money?
I do not work in finance, but I became curious about such things when the financial crisis hit. I ended up reading (among other things) Understanding Modern Money by the economist Randall Wray and the more populist 7 Deadly Innocent Frauds by the former trader Warren Mosler. Those books were the first time that I glimpsed a coherent view of what "reserves" and related topics are (seriously, almost every traditional media mention of the word "reserves" is a bit confused in some way - this really should be a topic in school curricula).
Since then I've just been piecing more things together by following blogs and tracing their statements back to original papers, including things like the actual text of the Basel regulation agreements and corresponding national laws (of Germany, where I'm from) and central bank publications.
They "eventually foot the bill" if twitter doesn't make money. Your cynicism reflects the fact that many companies don't end up making enough money. But there are counterexamples like GOOG where joe public actually did fairly well
Speculation on the other hand I can sort of understand and accept (although it's kind of sad that the speculation is driven entirely by hype rather than any kind of solid metrics).
I don't think anyone has claimed Twitter is going to be as efficient as Google at making money. But TV stations make a lot of money, and Twitter has a closer relationship to its users than a TV station. Twitter also has more users than most TV networks have viewers.
It's hardly a black swan to follow a model that has been proven to work over 50 years (ie, advertising around entertainment).
speculation is driven entirely by hype rather than any kind of solid metrics
Why do you say that? There are very solid metrics on Twitter's user base, and very solid metrics around what an average user is worth to an advertiser, either on the web or on a mobile device.
This is dangerous speculation.
Which is not to say that I believe twitter deserves the market cap currently implied by the share price.
GOOG has 56.52B in cash and short-term investments (as of end of september). It's on GOOG's books but could easily be paid out (either directly or in the form of a share buyback)
That part doesn't actually happen anymore these days rendering most of these new tech stocks very complex insider wealth generating schemes.
* After the IPO, money made by circulating stocks is of no benefit to company in question.
* Companies rarely pay out dividends (I usually see that in news, as if it was something special)- so buying stock in hopes of dividends does not seem a good idea.
* Publicly traded companies are then put under pressure to meet arbitrary analysts' expectations by majority shareholder(s)- which does little to help company meet it's long term goals.
None of this seems to create any value for anyone except stock exchange. So isn't stock trading just a legal way to gamble?
I can easily see the value added by banks (handling money transfers so we don't have to deal in cash, trading foreign currency when I need it, etc). Traditional investment is also (meant to be) of benefit for both parties- people with excess money can help fund businesses, which then in turn pay them back from their proceeds.
There sure needs to be something I am missing in the stock trading (the question being- what exactly?)
How else could companies with no revenue go public?
Sociopathy isn't restricted to finance. Silicon Valley has seen its share.
So because there are some corrupt bankers, one is simply best served to dismiss an entire occupation as "proven to not be trustworthy"?
Your lessons in logic are laughable.
How do you think, how long is it going to take them to cover their current market capitalization of $24670M? After that, they will start making profit for the shareholders.
If you're making an argument that their revenue growth has plateaued, that's a separate argument. But their current growth curve is impressive.
Shareholders will make a profit if the stock goes up or if it pays a dividend.
Banks' incentives are misaligned: a higher share price raises fees collected from underwriting since they get a % of total money collected in the IPO; a lower share price leads to commissions, goodwill and management fees from the private wealth/managed fund clients.
Could anyone elaborate on how these concerns are/may be separated to keep the process transparent?
The FB IPO was widely considered a failure because the initial share price was unsustainable. The underwriters had to buy massive amounts of shares on the IPO day to stabilise the price above the initial level. This, however, couldn't avoid the crash over the next months which lead to early public investors being underwater. Morgan Stanley's (as well as Nasdaq's) reputation took a big hit thanks to this and it will haunt them for quite a while. It's also the reason why the TWTR IPO is lead by Goldman Sachs and the shares trade on the NYSE.
The FB IPO certainly wasn't a failure in the capital raising sense. Fb raised a lot of capital than if they had IPO'd at $25 outright and the stock price had stayed there.
First, you're too fixated on "loss-making". IPO companies are almost by definition loss-making. IPOs are fundraising events. Growth companies use money to invest in the business for growth, not profits (yet).
Second, it's rare for early investors to cash out on the IPO (Facebook was an exception). Instead, they usually wait for a secondary or for the lockup expiration.
Third, yes, there is frequently an artificial "pop" on the day of the IPO because of the pent-up demand but that usually tempers quickly. Investors should definitely be careful and know what they are getting into. If they bought into Yelp, LinkedIn or even Facebook at the popped price and hung on as long term (read: every) investors should, they are doing fine.
Fourth, yeah, the investment banks get to dole out typically underpriced shares to their top clients. Get over it.
Fifth, the banks do take on some risks. Facebook IPO presented the banks with considerable risk of loss depending on when the banks were able to unwind their positions.
Sixth, the pre-IPO market has evolved such that a lot of people who want in are getting in prior to the IPO.
Feeling cynical might be fun but isn't very attractive or lucrative.
Woah there. I think this is the fundamental issue. $25b of wealth hasn't been created. It's not free money. It's a scam.
Though I'd rather say that an IPO serves to acknowledge the worth already created by the company before the IPO?
Yup, and now the word "wealth" is just a random series of letters when I read it.
So the short short answer to "If you print some more money is that wealth?" is "No".
Also joe public isn't really joe public. Joe public is hedge funds and pension funds controlled by professionals. Your 401k or pension might have some twitter, but in that case it was a professional making the call. Regular twitter users aren't bidding the stock up. They make up a small part of overall trading activity.
It could be argued that the Facebook IPO pricing was absolutely brilliant, in that Facebook and its selling shareholders received (what in retrospect was) top dollar under the then-extant market conditions, instead of in effect giving away hundreds of millions of dollars to the fortunate few who were able to purchase IPO shares.
Maybe you remember the dot-com boom in 1999? It looked somehow similar.
Twitter revenue was $391M for last 4 quarters .
Twitter market cap is currently $24670M, or about 63 times the revenue. If Twitter's revenue grows 100% each year (that is, twice each year), it will take 5 years for them to catch their current market cap with revenue: 1 + 2 + 4 + ... + 32 = 63.
But what investors are interested in is not revenue, it's profit. Let's imagine that Twitter discovers a magnificent monetization strategy that gives it 25% margin, like the one Apple enjoys. It would then pay out its market cap in 2 more years (4x growth).
This assumes that Twitter will always enjoy unfettered 2x revenue growth and the same high margin each year, while its valuation stands still, as does the dollar inflation. All these assumptions look a bit unrealistic to me, alas.
As for your numbers, there is no reason that a company needs to match their valuation with revenue each. That would likely be extremely undervalued. Apple had 170 billion revenue in the last 12 months and a market cap of 465 billion that many people think is undervalued. 63x is excessive, but 1x is silly.
>But what investors are interested in is not revenue
That's not always true. See AMZN
Profit is what I am interested in, and it is what a lot of people are interested though. Why are we comparing it to Apple, a hardware company with huge costs? It makes a lot more sense to compare to Facebook, which enjoys 50% margins. Also, why are we expecting it to have profits = to market cap? Really, 1x pe? Market average is ~15, with lots of companies being higher.
If, in 7 years Twitter has profit = to it's current market cap, it is an absolute steal at this price. Like unfathomably good deal. I'm not convinced they will keep growing revenue at 100%, certainly not for 7 years, but I am convinced that they will become profitable due to their low cost structure. I wouldn't be surprised to see 50% margins.
It will be a quite long-term investment anyway. Like, well, when Forrest Gump invested in AAPL.
Why should the current years revenue have anything to do with market cap?
Congratulations to whomever was on the sell side of this today. Sucks to be an employee who is locked up for 180 days.
Most of the people who bought at $26 and flipped at $40 or $45 were individual customers of the banks. These could be retail investors, but they were largely institutional.
Generally institutional funds that do IPOs aren't flippers (investors prefer stable capital, so banks don't allocate as much to hedge funds) but they were the ones who had the shares.
Net - the banks weren't the ones getting rich from flipping, their customers were.
The banks are triple dipping on the IPO: the fee (3.25%), their options on 10M shares, and their ability to limit IPO access to clients that give them profitable business.
That said Twitter extracted some sweetheart loans from their underwriters and the fee is much lower than the usual 7%, so it's definitely a two way game where both sides are trying to take advantage of the other.
I guess I'm fine with that as long as everyone playing knows the rules (although it's tough for the index funds that have no choice in the matter).
Of course, we have to wait and see what it settles at, and it's a little premature to heap scorn just yet. But the initial reaction is it looks like they overreacted to the Facebook IPO debacle (in my book, Facebook did the best thing possible for the company and extracted as much value as possible from the public markets --- and the value buyers didn't get screwed, given that a year later it's trading at ~20% above the IPO price.).
Facebook was the fuckup because they priced correctly and all the buddies of the underwriters didn't make bank on the IPO. Twitter is back to the old system and nobody will be complaining this time around.
If you give a shit about bankers (most of us do not), then you win.
There have been a few exceptions to this, Apple being the most famous one. Facebook was on the same track but the SEC rules about share ownership forced their hand.
Notable pull quote: "It's important to note that if any other company spent until their EPS was negative, investors would /flip/. Amazon is playing with razor thin margins while trying to scale up a platform to end all platforms that we might someday use for everything without thinking about it."
So again, like Apple and Facebook, everyone knows the CEO is playing the long game and doesn't give a crap what the stock price is.
Haven't seen a situation or company like that since.
Choosing a good price is a) hard, because of the due diligence, and b) expensive, because if you chose wrongly, you lose money (in an auction, this is called the winner's curse.) So the cost of estimating the price before the shares are on the market needs to be priced in to the initial sale price.
Probably doesn't explain a 100% jump though, but in regard to the rich supposedly supporting free markets, I will remark that people's ability to be for things when they are applied to other people, and against them when applied to themselves, never ceases to amaze me.
“The company did everything to secure the most cash for itself while leaving some money for the IPO buyers,” said Josef Schuster, the founder of IPOX Schuster LLC, a Chicago-based manager of about $1.9 billion. “You need a pop at the opening to leave a good taste with everyone. They did a pretty good job managing the whole situation.”
Are you suggesting markets are not efficient? In that case, when can we expect you to become extremely wealthy from your inefficiency-proving strategy? (Claiming the EMH is false is equivalent to claiming that such a strategy exists.)
Incidentally, when an actor behaves irrationally in an efficient market, this happens:
Knowing that the market is inefficient is not equivalent to knowing which stocks to buy or sell, or when to do so. It doesn't give you a magic formula, but it does give you some idea of what to look for.
FWIW, I have done pretty well picking stocks for myself, but I'm far from what I would consider "extremely wealthy". That being said, if I had a magic formula for instant huge wealth you can be damn sure I wouldn't be sharing it.
Market efficiency is not a moral concern; it's more like a physics observation.
In fact trying to understand economics with morality or some other form of normative claim is a huge and quite pervasive mistake that destroys people's ability to understand it before they even start trying. It's a machine. What we do with it may be moral or immoral, but the market itself is all but a natural force.
At the very least, if not me, Warren Buffett has shown that the market does in fact exhibit large-scale persistent opportunities. You just have to be patient. I don't think "arbitrage" is actually the relevant term here. It has a very specific meaning that isn't simply a stock being mispriced. Really though, the market offers deals all the time.
FWIW, I don't have Buffett's track record, but I currently have 20 stocks in my portfolio most of which I've held for several years. Of those, 19 have made money and 1 has lost a small amount, and on the whole I've beaten the market nicely. I could just be written off as lucky, or as about to lose lots of money, but how do you explain Buffett? He has a track record of consistently beating the market by wide margins for 50 years. Seems like that wouldn't be possible under EMH.
As for your positive returns, the easiest explanation is that you're in a green square on this graph (suitably updated): http://www.nytimes.com/interactive/2011/01/02/business/20110... (Read what the graph is carefully, most people misinterpret it at first glance.)
...on average. Which is what makes "beating" the market, over enough time, impossible.
But we know there are pricing discrepancies and information asymmetries in finite periods of time because we see them every day.
The EMH is false for values of "efficient" that are interesting, and the values of "efficient" for which it might be true are boring and useless in the grander scheme of things.
A lot of needless bad blood enters discussions because everybody interprets the word "efficient" as they please.
But I'd be selling it, and you can find out how by buying my book for the low, limited time price of three payments of $99.99. If you act now, we'll also throw in this great place-mat shaped like a $3 bill, and a ring-tone for your phone that sounds like money. Just pay separate shipping and handling. <insert three thousand word disclaimer here>
What if I were able to prove that markets are inefficient because efficiently pricing securities is an NP-complete problem? Well, sure, maybe a strategy exists, but if it requires solving an intractable problem then I'm not about to get rich off of my proof ;)
That depends which recent Nobel Memorial Prize winner you believe.
My understanding is that much of the progress in economics has been merging economics with psychology to identify rational failures.
So in microeconomics or small models, people can practically accept and implement these (pretty obviously true) ideas that people don't behave rationally. But in large scale macroeconomic models it's hard to do. It would certainly be a lot easier if people just acted like computers...
It's like the law of large numbers; while a single transaction may have a completely wrong price, a sufficiently large number will average the irrationalities out.
The truth is not so - people get irrationally exuberant or are afraid to cut their losses, etc. These are problems of statistical bias of their estimations - and the opposite is assumed in many (most?) economic models.
More importantly, they're a huge waste of resources that produces nothing of economic value.
He doesn't actually claim the markets have perfect information, just that the price always reflects all available information. In essence, you can't "beat the market" consistently, assuming you have the same information.
Which you don't, since Goldman Sachs is always a few milliseconds ahead of everyone else. Given that almost everyone else out there is going to be trading on information that has already been consumed and acted upon by privileged parties, the markets may as well for all intents and purposes be irrational.
If you were able to do that, that means that VMWare and Visa both got screwed out of billions of dollars.
And of course, little guys can't get in right at the IPO price. That's reserved for big players. By systematically underpricing IPOs, the finance folks make billions of dollars for their friends at the expense of the companies they're supposed to represent.
Furthermore, when an IPO is priced such that this does not happen, such as with Facebook, it's criticized and called out as a disaster even though they sold all the stock they wanted to issue and made much more money for their company than they would have otherwise.
That's not a real thing.
Not true. If I'm selling 1 share and see $40, I can probably get $40 for that share. If I'm selling 1M shares it is a lot harder to get $40 for every single one. If I'm selling ~550M shares with zero existing market then getting that $40 is nearly impossible. Twitter worked out a guaranteed ~$26/share which is pretty good. A bird in the hand is better than two in the bush and all that.
Please correct me if I misunderstood something.
Fiduciary duty to who? The shareholders that cashed in today are the same ones who are behind the IPO. You're trying to make it seem like some poor distant shareholder got screwed over, which is not true.
Unless you mean that twitter "sold" shares at $26, but the actual value was closer to $46 - meaning their investors nearly double their money, and twitter raise nearly half of what they could have?
The fact that people are now willing to buy them for $46 a share suggests that they basically sold them at too low a price (arguably $20 a share too low).
In doing so they've lost out on a fair bit of money. Establishing a value ahead of the flotation is difficult and often companies will err on the side of caution (that is sell slightly cheap) to make the sell off look like a success, but I think it's being suggested that this gap is too big to just be that and that some of the previous owners may be unhappy that they've lost out.
They have failed to gain that (admittedly huge) chunk of dollars but they have lost nothing: the have the same money they started with and they never had any more than that. You only lose when you start with X and end up with X-Y, for positive Y.
They have probably missed the opportunity to gain more but that is their mistake (if it is a mistake).
They lost out, just as if I took your $20k new car and gave you $10k, you'd have lost out even though you have more cash.
What happens is that they did not guess (and this is an important term, there is no inherent value in a guess) TODAY'S market's expectations correctly. But that has little to do with true monetary loss or gain.
Of course, their expectations today might be crushed. But personal expectations and hopes are not valuable as shares are.
It's not clear cut but the share price hitting $46 suggests that they could have floated successful at a higher price.
My opinion is that if they had not gone public, nobody would have bought their shares for $46 each. But this is a worthless statement :)
Could it not be the case that while they could find buyers for some of the shares at $46, they could only guarantee selling all of the shares at $26?
About $553 million in revenue in the last year, with spending of $668 million.
About -0.20 net? Is accounting detail. Instead, please to look at sales growth. Give me more cash, I grow more sales. I entrepreneur!
I meet investment bankers. We go to club. Many strippers. I give them $1.00 from sales. Everyone happy.
Welcome you invest now! You welcome!
This IPO is going really well. The stock is being well received in the marketplace. I know twitter employees who just got rich are reading this, but can't comment due to SEC rules, so congrats Twitter peeps!
Why is this bad? It can cause a couple of negative effects:
(1) Good companies that deserve the attention of investors may be starved of capital while billions of dollars gets directed to flashy overvalued companies.
(2) If it turns out to be another bubble, investors will feel burned and they'll become more risk adverse in the future. Investors will be reluctant to provide capital to companies that can make good use of it.
Twitter just made more money from selling stock than they have ever earned in revenue in their lifetime. Something is seriously wrong when companies start making more money from selling stock than they do from selling products or services.
They IPO'd in mid-March 2000. The tech market almost immediately began collapsing the next day.
The founder used to give interviews during the so-called quiet period. A shareholder class action lawsuit argued the prospectus was false and misleading.
They sold to Nokia for $60 million in 2006. $60 million, not $1400 million.
I guess people remember the last time around when companies losing money instead of making money IPO'd.
On an individual level, it's hard to predict if Twitter will do well or not, but on a general level it's safe to say that companies large enough to IPO are generally safer when they're making money as opposed to losing money.
So the tech isn't interesting, nor is the business. The interesting part here is what people are willing to pay for it.
As already happened several weeks before (after it was announced Twitter will be trading as 'TWTR'), the wrong stock exploded due to traders mistakenly placing their buy orders.
It should have been perfectly safe to assume similar would happen on the IPO day. It went from $0.03 yesterday to $0.06 today for a while :)
Just look at this graph over 1 month span:
Third, the volume for that stock is only 1.5 million shares a day, that's only 40,000 dollars worth of stock traded a day. To give perspective that's less than the average amount of Microsoft stock traded in a single second.
So no... you really couldn't have done this strategy.
This must be what non-programmers feel like when somebody links them to a GitHub repo.
So for everyone who got shares before the public trading, their stocks are way up.
(This is also why people are saying that the IPO price was set way too low; insiders make tons of money but Twitter itself raises much less money.)
Google Finance doesn't seem to show previous close, but Yahoo Finance does: