Why a Twitter I.P.O. Should Go Dutch
By JEFFREY GOLDFARB
Breakingviews
August 15, 2013, 3:05 pm
Maybe Twitter should Google its initial public offering.
Instead of a typical share sale, the Internet search giant catered to individual investors with what’s known as a modified Dutch auction. Though flawed, the unconventional approach is worth consideration by Twitter and its chief executive, Dick Costolo, as anticipation builds for the $10 billion social network to go public.
Start with the premise that Twitter, because it has more than 500 million users, will confront mass appeal for its shares beyond the standard demand from mutual and pension funds. In another similarity with Google and Facebook, traditional valuation metrics may be tough to apply. And even if some investors focus on fundamentals, Twitter risks unleashing a stock whose main attraction will be that many others want to buy it.
The process used by Google founders Larry Page and Sergey Brin successfully mitigated some of the hype that Facebook couldn’t. The auction style asks investors to declare how much they’re willing to pay and for how many shares. The price steadily declines until it reaches a level where all the shares on offer would sell — at which point all interested buyers commit.
Google left itself latitude to cut the price further, which it eventually did. The decision elicited much criticism but also eradicated the feared “winner’s curse” that instead would years later befall Facebook investors. The social network’s 2012 debut was marred by technological failures and in only a few months the shares had fallen by half. By contrast, Google stock popped by about 18 percent on its first day of trading, achieving the generally desired result of raising the targeted funds for the company and any selling owners while giving new shareholders a warm welcome.
Not everything was handled sensibly in Google’s I.P.O. For example, Twitter would be wise not to copy the ultra-short 15-day lockup period for share sales that Mr. Page and Mr. Brin allowed for some executives. Google also pushed back too hard against Wall Street.
Using an auction reduces the standard role of underwriters, but they’re still needed to liaise with investors. Over-aggressively slashing fees irked bankers unnecessarily and cost the company some important goodwill. Learning from the Google and Facebook market debuts would give Twitter a chance to master the popular tech IP.O..
Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
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