Tech IPO pricing an art, not a science

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Twitter trade-R-600


Three days before Facebook’s market debut in May 2012, underwriting banks increased the IPO price range from between $28 and $35 to between $35 and $38 and the deal was priced at $38.

The stock fell immediately and traded down more than 50% over the next few months. The IPO was underwritten by Morgan Stanley, JPMorgan and Goldman Sachs.

Fast forward three years to Square, the mobile payments and merchants service provider run by the co-founder of Twitter, Jack Dorsey, which priced its IPO on November 19. Priced below the $11 to $13 range at $9, the shares immediately leapt to $14.78 and closed at $13.07. The IPO was underwritten by Morgan Stanley, JPMorgan and Goldman Sachs.

In between these two deals the same three underwriters underwrote the Twitter IPO, where shares jumped 73% from their IPO price of $26 to open at $45.10. 

Reading investor demand and translating this into the best price for the client is fundamental to the IPO underwriter’s job. A first day pop of 10% to 15% is deemed optimal. Past performance is obviously not an indication of future fee business in tech IPOs.