Why the Twitter launch left $1.5bn on the table

Twitter

Why did Twitter leave $1.5bn on the table? The attached link (found here) attempts to discuss the possible explanations as to why Twitter, and their underwriters, left so much money on the table. There are three main possibilities (or a combination of some or all of these factors) that might explain why Twitter left so much money on the table.

The first consideration is Facebook’s IPO disaster that priced @ $38 per share and after vigorously being defended at that level by the stabilizing underwriter rolled over the following day, before hitting a 52-week low of $19.56 per share. Twitter and underwriters knew they had to price the deal to work, but I don’t think anyone involved intended on leaving $1.5bn on the table.

The second consideration is the fact that Twitter is hard to value.  Twitter is not currently profitable (although CEO Dick Costolo points out that they could be if they wanted to be) but their large user base has the potential to make the company very lucrative down the road.  Twitter also has limited comps, those that do exist like Facebook, LinkedIn, Yelp, etc. while being Social Media companies have a much different business models and were difficult for bankers to value at their respective IPOs which complicates the underwriters price discovery process.

The final consideration (and most controversial) is that the underwriters may have a conflict of interest in pricing the deal.  Underwriters profit from the gross spread paid by the issuer but they also get kickbacks from happy customers that received Twitter allocations from them in the form of unrelated trades.  In this case, the underwriter benefits whether or not the deal is priced appropriately but Twitter’s balance sheet does not.

Personally, I think the main factor at work behind Twitter’s mispricing is the fact that the company was hard to value and to a lesser degree Facebook’s IPO woes supported this.  I know many people would love to point their finger at the bankers, and it is true that they receive compensation that may support a case for having a conflict of interest, but if they mispriced every deal like this companies would take their business elsewhere.

With that said, what do you think were main factors contributing to Twitter’s mispricing?

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One thought on “Why the Twitter launch left $1.5bn on the table

  1. Financial institutes seem to be the big winner. It is really hard to say how well banks can price a business, but I think they can do a lot better on this than their clients.

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