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Saturday, 18 November 2017

North America Equity Issue: Twitter’s US$2.093bn IPO

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Think Google, Facebook, Zynga or Groupon. Ultra-hyped internet IPOs have found it very difficult to deliver a smooth path to public markets.

Twitter’s listing attracted the same surfeit of media and market attention as these deals, if not more. Yet by playing “straight down the fairway”, as insiders dubbed the company’s approach, the microblogging platform’s US$2.093bn (including Greenshoe) offering was completed within a compact timetable, was relatively controversy-free and proved a spectacular win for the select group of investors able to get stock.

“Twitter handled its IPO in the same manner it has grown its business over time,” said Goldman Sachs’ global co-head of TMT investment banking, Anthony Noto. “Our aim was to help them achieve a goal of maximising value for shareholders while setting the stage for their future growth.”

Twitter was advised by Goldman Sachs and a broader syndicate that included Morgan Stanley, JP Morgan, Bank of America Merrill Lynch and Deutsche Bank as bookrunners. Allen & Co and Code Advisors took up co-manager roles.

Sticking with the tried and tested bookbuild, Twitter and the syndicate opted against the modified Dutch auction that tarnished Google’s 2004 debut.

In contrast to Facebook’s IPO, though, they also went for a tight free-float with no insider selling. They resisted the temptation of an 11th-hour upsize, even though the deal was more than 30 times covered.

Roughly half of the deal was allocated to a small group of qualified long-only institutions, investors that had demonstrated their understanding of Twitter’s business model and had made their own detailed projections for Twitter’s growth.

This meant less of the deal was placed in the hands of hot-money investors like hedge funds than has sometimes been the case in tech IPOs, including, arguably, Zynga.

With a straightforward business model under the “adult supervision” of CEO Dick Costolo, a single-share class structure and no obvious accounting tricks, Twitter also sidestepped the pitfalls that Groupon famously encountered.

Managing expectations from a valuation perspective was also key to the deal’s success. Twitter confirmed initial interest with what might be considered a conservative valuation, at least by social media standards, of US$17–$20 a share or US$11bn. It was not until a few days prior to pricing that Twitter pushed the valuation up to US$23–$25 or US$14bn, before finally pricing at US$26 or nearly US$15bn, around the valuations that many bullish analysts held prior to the deal’s launch.

Day-one gains of 73% valued Twitter’s equity at nearly US$25bn, more than relatively established and profitable professional network and deal comparable LinkedIn.

First-day volumes were 117.4m shares or about 1.7 times the 70m offered in the IPO, but less than the hectic level of day-one turnover seen on other hot tech IPOs in recent years – another sign of judicious allocation.

To see the full digital edition of the IFR Review of the Year, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

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