Equities: Twitter tease fuels IPO speculation
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Equities: Twitter tease fuels IPO speculation

S-1 filed in secret; Market capitalization could be $16 billion

We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.

— Twitter (@twitter) September 12, 2013

Twitter’s pithy 140-character one-liner announcing its confidential S-1 filing with the SEC last month sent the financial markets rumour mill into overdrive.

The S-1 filing is in preparation for the San Francisco-based micro-blogging site’s much-anticipated initial public offering. It was filed in secret under provisions of the new Jump Start Our Business Startups (Jobs) Act, but market chatter has already filled in the blanks, including 2012 financials, valuation, target raise, syndicate and likely aftermarket performance.

Twitter is understood to be preparing to sell between 50 million and 55 million shares at a valuation of $28 to $30 a share, giving the company a market capitalization of $15 billion to $16 billion.

The Twitter IPO appears supported by generally good equity market conditions, with a relative lack of new tech IPOs giving the firm plenty of elbow room. According to Cully Davis, managing director and head of Credit Suisse’s equity capital markets division in San Francisco, a Twitter IPO should find a receptive audience. The Swiss bank worked on the Facebook and Google IPOs, among others.

"Prospects for the TMT sector are actually quite good and we continue to see strong deal preparation activity for the rest of the year," says Davis. "Bernanke and the Fed bought the market some additional runway with his comments last month, and the market reacted positively to the Fed kicking the inevitable can down the road. The next few months are well positioned for new issues."

Cully Davis, managing director and head of Credit Suisse’s equity capital markets division in San Francisco
Cully Davis, managing director and head of Credit Suisse’s equity capital markets division in San Francisco

He adds: "It’s been a reasonably light year for tech IPOs, with less than 25 new issues priced against a historical average of between 40 and 50 a year. We are going to end the year well below the average and from that perspective I think the market can certainly handle more issuance."

Michael Prachter, managing director, equity research, at Wedbush Securities in Los Angeles (who famously criticized Facebook founder and CEO Mark Zuckerberg for wearing a hoodie to an investor presentation ahead of that company’s ill fated IPO in 2012), says that recent secondary market conditions also offer a strong following wind.

"The institutional market is really hungry for these deals, as evidenced by record highs for Facebook and LinkedIn as well as a host of other internet stocks," he says.

Bloomberg News announced that Goldman Sachs had won the lead-arranger mandate within an hour of the official tweet, with JPMorgan and Bank of America added by unconfirmed market sources in the following days. Twitter, Goldman Sachs, JPMorgan and Bank of America all declined to speak to Euromoney for this article.

Inevitably, there have been many warnings for Twitter to heed the lessons of Facebook, whose market capitalization was slashed in half after raising $105 billion via an IPO in May 2012. Poor IPO performances for Groupon, which lost 40% of its market value following revelations about poor financial reporting controls, and Zynga, a social gaming company that failed to generate the first-day price pop that tech investors consider to be the hallmark of a successful public market debut, have left investors asking if Wall Street has gone cold on social network IPOs.

If recent reports stating that Twitter will list on the New York Stock Exchange rather than traditional tech exchange Nasdaq are true, then Twitter is already taking steps to ensure it doesn’t repeat Facebook’s mistakes. Nasdaq has since paid $40 million to settle claims that investors suffered losses as a result of technical glitches on the first day of trading, including the $10.7 million it made in fees from Facebook.

Twitter might pay heed to previous social media IPOs in terms of structure as well. "Given what we know around the board structure and the general scepticism with respect to auctions, I think its unlikely that Twitter will adopt an auction structure for this IPO," reckons one TMT expert. "Companies that used the auction approach previously, including Google, Netsuite and Rackspace, all had significant single shareholders who owned a big portion of the stock, and decision-making authority was very centralized. Twitter doesn’t have that concentration, and decision-making will be a much more diverse process."

Cully at Credit Suisse notes that investors have punished social networks that failed to live up to their revenue expectations. "Social networks are a little less hot than they were a year or two ago, mainly because some of these consumer-oriented, retail-facing social companies didn’t fare so well," he says.

An active area of speculation so far has been Twitter’s revenues, especially its income from mobile advertising. According to eMarketer, an independent market research company covering digital marketing, media and commerce, the company generated $288.3 million from paid advertising last year, and will make $545 million in 2013. eMarketer predicts revenues of $807 million in 2014, equivalent to 48% projected growth. Mobile advertising accounts for around half of Twitter’s total advertising revenues, according to eMarketer.

"Mobile advertising has been an incredibly big space and has got the attention of many investors," says a TMT banker. "However, it can be something of a zero-sum game, as for one company to do well, it is essentially taking market share and margin from another company, which might start to struggle. Until we see some consolidation, there will tend to be bright lights that flash very briefly and then fade away."

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