The Twitter roadshow started with a visit to Morgan Stanley Friday morning by Twitter’s chief executive and chief financial officer, Dick Costolo. Despite losing to Goldman Sachs for the “lead left” position for the IPO, Morgan Stanley is one of the top brokers on the deal.
On Thursday Twitter (TWTR:NYSE) set its stock price between $17 and $20 a share, making the company worth nearly $1.3 billion, and moved the sale to November 6. Yesterday the New York Stock Exchange did a dry run aimed at avoiding some of the problems that plagued the NASDAQ Facebook (FB:NASDAQGS) IPO launch. We have seen a lot of strange things happen to companies after they go public and with the S&P up 24.5% the past year it may be time for the public to gauge its expectations.
IPOs up 40% in 2013
With over 160 IPOs (initial public offerings) this year and the markets up so much, many traders are questioning why investors should jump into such a crowded space. According to Fidelity Investments, IPOs are up 40% from the same time last year and the dollar value of those offerings has increased 10% with technology in fifth place making up just 12% of the offerings. Brian Conroy, president of Fidelity Capital Markets, said, “The market for IPOs is as strong as it has been in some time. The more brand recognition a company has in the marketplace, the higher probability it will attract a greater share of investors, all things considered.” That said, not all IPOs have gone as planned. Whenever there is a rush to get into a big IPO it creates risk. In the 1990s the trend was to jump on the IPO bandwagon, but today’s IPOs don’t make as much as they used to and many advisors are just not interested.
The big winners
Everyone always remembers the big winners, but not all IPOs end up that way. Many times IPOs don’t go straight up and end up selling off first. Among the questions investors have to ask themselves:
- Are they buying Twitter for a long-term investment?
- Does Twitter have sustainability?
- Is it a business that people believe in, and how long will the company remain pre-eminent?
- Is Twitter (TWTR) something people will be interested in 10 or 20 years from now? Or is it a get in and get out play?
- It’s always great when an investor holds on, but with stocks up so much in 2013 and a possible Fed taper at the end of the first quarter, how will the stock fare?
Some bummer IPO’s
When a private company goes public it’s generally to expand its capital and reach and expand its profitability. Just because a company goes public, that does not guarantee it success. In fact, there has been a long line of firms that went through the process and didn’t make it. Their business models failed. Sure an IPO can raise millions, but that only serves to mask the flawed business plan. “Hey, if this many people want to give us money, our business plan must be great, right?”
For years big money has chased the big name IPOs, but not all ended up as investors would have liked.
Vonage went public in 2006 and was one IPO that did not fare well. The initial offer raised $531 million but the stock crashed when a lawsuit was announced and the firm lost 30% of its value.The stock opened at $17 a share and one day later the stock dropped 24% down to $13, the largest drop of any stock all year. When the public tried to get out, sales went down even as the value of the stock got wiped out. But Vonage still had to pay the IPO price. The stock has never recovered.
Kozmo.com announced an IPO on March 21, 2000. Kozmo.com (KZMO) was an online convenience store that promised to deliver food and household products “in less than an hour” and they did not charge anything higher than retail prices. The company started in Manhattan, people that worked for the company made deliveries in six cities in vans, on bicycles, motor scooters and on foot to customers’ doors. Like many startups Kozmo got off to a good start, recording a 30% jump in new customers each month, but accumulated $27 million in debt. After going through $280 million and very low public demand, the company was forced to lay off all of its 2,000 employees, and the stock tanked.
Had its IPO in 2000 and raised approximately $82 million. The San Francisco-based company failed to understand that pet shopping online was unsustainable and had a flawed business plan. The value of the stock went from $14 to 22 cents. Amazon.com held a major stake in the company.
Webvan’s business model was simple: deliver groceries. While there are a few successful companies that deliver groceries, this was another company with a flawed business model. After raising $375 million it was transcended by its own growth. Not long afterward, the company went into insolvency, laid off 2,000 people and was added to the list of failed IPOs.
Blackstone 6th largest IPO in history
Talk about hype. For months before the initial public offer the Blackstone IPO was was advertised all over the place. The sixth largest IPO in history raised $4.7 billion yet failed. The Blackstone name had pushed investors from all over the globe but after the stock crashed on the first day and lost almost 50% of its value. After being sued by investors, Blackstone agreed to pay $85 million to settle a class action lawsuit by investors who accused it of failing to disclose bad investments it made ahead of its IPO in 2007.
eToys was the 5th biggest IPO at the time
The 1999 IPO became the came in right at the time of the dot-com bubble. Good plans need to be executed. eToys had a good plan but while they had a good ‘front end” idea it was the cost of the “backend” that killed them. Despite the stock going public at $20 and running up to $76 on the first day, the company filed bankruptcy two years later. eToys spent all of its time building out an infrastructure to help deliver the toys people were buying. eToys fell prey to the same problems that haunted Kozmo and Webvan: all three firms spent most of their money on infrastructure. On Sept. 19, 2013, 14 years after the IPO, litigation over Goldman Sachs’ role in the spectacular rise and fall of eToys finally ended with a court-approved settlement of $7.5 million.
Facebook IPO flop
One of the most advertised and promoted IPOs ever was Facebook (FB:NASDAQGS) Every bank, hedge fund and prop trading firm all the way down to the individual trader wanted a piece of Facebook. But in the world of “things that may go wrong can go wrong” the firm set a price of $38, peaked at $45 and made a low at $18.87. The IPO was overshadowed by a NASDAQ technical glitch that made it hard for investors to know whether or not they bought the stock. Despite the selloff the stock has made a big recovery and closed at $52.45 on Friday’s close.
No one knows what Twitter’s sustainability is going to be. Right now it’s a hot topic, but could it end up like many of the stocks above? Is there value in tweeting? @MrTopStep has nearly 16,000 followers, so for us the answer is yes, but we also know that at any minute another firm could come up with another product that will be the next fad. That said, we think the stock will dip in the early stage and will more than double in price over the next year and a half.