The company that is single-handedly destroying modern language with hashtags has decided to go public. On Thursday, Twitter announced that it had filed for a secret initial public offering (IPO). What’s so secret about it? I’ll explain that later. But if everything proceeds as planned, Twitter will follow the footsteps of other social networking websites that have gone public such as Linkedin and Facebook.
Before discussing Twitter, it is important to comprehend why companies decide to go public. Most companies in developed markets are privately owned. Even some big names such as Domino’s Pizza and IKEA are private firms. Being private allows the management and owners of the company to implement policies with more ease since they aren’t continuously under the scrutiny of analysts and shareholders.
However, a company may go public if they need to raise cash, or in finance-speak, capital, from external sources for the company to grow further. Of course being listed on a stock exchange also gives firms a considerable amount of prestige. Firms usually hire the services of investment banks such as Goldman Sachs or Morgan Stanley to publicize and organize the IPO so that investors are drawn to buy the company’s stock once it goes public.
Once a company does go public, investors will be watching over the company like a hawk. Earnings reports, management statements, new product launches will be observed with much more attention. Because of increased profit expectations, you can expect the company to either launch new products or revamp its business.
With that background information on IPOs, we can now focus on Twitter. Twitter is expected to be valued at around $10 billion and has around 200 million users. Even though Twitter has been successful so far, it’s a smaller company when compared to other Web platform giants such as Facebook, Yahoo, Google and Amazon. By going public and raising capital, Twitter will be seeking to cement itself as one of the big boys of the web industry. In order to develop itself, Twitter will attempt to generate further ad revenue, expand its features, and integrate itself even further with other products. In fact, in an effort to enhance its mobile advertising feature, Twitter recently acquired MoPub, a startup that focuses on mobile ad exchanges
So far it looks like its all going to be sunshine and rainbows. Twitter will go public, its share prices will rocket because everyone has a Twitter account, everyone will get rich, and world peace will be achieved. Right? Right? Wrong! Investors should be very careful when approaching IPOs and in my opinion, its best to avoid them altogether. There are several reasons why it is wise to avoid IPOs.
1) Firstly, being a public company is a hassle for most firms. They must adhere to various regulations and constantly please investors. Thus most firms choose to stay public. But if they do decide to raise capital, they could do it via a private placement. As opposed to a public offering, a public placement is a way for companies to raise capital by only selling ownership to a few individuals. This process is much easier than having to go through a public offering. If a company has decided to engage in a public offering, it could be that the company failed to raise capital through a placement because they were unable to find large investors. Thus it is important to ask yourself, what is the state of the company I’m planning to invest in?
2) The IPO will be the first time that a company will have to adhere to certain regulations and reveal its financial statements in detail. Thus your previous conceptions about the firm may be mistaken. The only solid information you will have access to will be the information provided by investment banks who are desperately trying to attract investors. This is also where the term ‘secret IPO’ comes into play. According to the JOBS Act which was passed last year, a company with revenue below a certain point can release less information prior to an IPO than a firm with higher revenue figures. This makes Twitter’s IPO filing even more suspicious. What have these guys got to hide? Be wary. Wait a few months for the firm to be in the public domain and find its true value.
3) Most institutions investors who purchase shares during the IPO tend to hold them for a few days and then dump them to make a quick profit. This is why after most IPOs, the price of the stock initially falls. To see a good example, take a look at Facebook. Its price plummeted after the IPO and it took 14 months for it to reach its original price.
Thus, after an IPO, its wise to hold back for a minimum of 4-5 months for the price to settle and the company’s shares to find its true value as opposed to the initial artificial IPO price. You can probably tell that I despise hashtags but if I ever had to use one, it would be as follows: #dontfallforthehype
For more insight, feel free to watch this clip from Bloomberg.
“I’m kind of like the person you would want to ask least about how to make a smooth IPO.”
-Mark Zuckerberg, in response to whether he had any advice for Twitter