Twitter gets only the $1.8 billion that comes from the initial sale of the stock — which its banks priced at $26 per share. That the shares nearly doubled in the first few minutes of trading and stayed there through the day may demonstrate that Twitter could have raised a lot more, analysts said. After jumping more than 90 percent from its IPO price, to $50 a share, Twitter’s stock closed at $44.90 a share.
The primary parties that benefitted from the rising stock price were the banks — which in addition to commissions receive shares that they can bestow on favored investing clients at the initial offering price of $26. Unlike employees of Twitter, many of the investors could dump their shares immediately, pocketing a massive gain in one day.
Twitter’s investment banks, which were led by Goldman Sachs, had spent weeks meeting with big funds and wealthy investors, assessing what they ultimately might pay for Twitter shares, as well as estimating the company’s growth potential. But coming up with the IPO price involves some guesswork — it’s a little like a real estate broker trying to price a newly built house that has no sales history. And some analysts said the banks may have gotten the price wrong.
“Theoretically, it should be an embarrassment for both senior management and the [investment banks]. But that’s not the way it’s spun,” said Erik Gerding, an associate professor at the University of Colorado Law School. “It often looks like a great public relations coup to have your stock shoot up immediately. But what it really shows is that the market for social media stocks is really frothy.”
The fact that the IPO most benefited Wall Street insiders was particularly jarring given Twitter’s populist roots and the company’s reputation as a service to the people. Twitter even went so far as to put prominent users, rather than executives, in charge of ringing the opening bell to mark its first day of trading. “Star Trek” actor Patrick Stewart, 9-year-old lemonade-stand owner Vivienne Harr and a representative from the Boston Police Department were on the podium.
Some securities experts say Twitter and its banks may have settled on a conservative stock price to avoid the type of debacle that unfolded when Facebook went public and its share price dropped on opening day.
There’s often a debate as to how to appropriately value a company as it prepares to go public. In a perfect world, the optimal pricing would lead to a modest pop on the first day of trading, roughly in the 15 percent ballpark, legal experts said. But getting the numbers right is more art than science.
“Outside of optimal pricing, if your choice is having the price go to the moon or drop like a stone, obviously anyone involved in the IPO process would pick the former rather than the latter,” said Joel Trotter, a securities lawyer at Latham & Watkins. “A drop will often mean that you’ve got disappointed investors, or worse.”
Twitter spokesman Jim Prosser declined to comment on the company’s stock performance. Goldman Sachs also declined to comment.
The offering made newly minted billionaires of Twitter co-founders Jack Dorsey and Evan Williams. Williams’ 56 million shares of the company were worth $2.5 billion by the end of the day. Dorsey, now chairman and the author of its first-ever message, saw his stake in the firm rise to $1.05 billion.
Ahead of the public offering, Twitter faced some skepticism over whether the company was ready to go public. It has never turned a profit, is attracting new users at a slower rate and has yet to prove that its advertising model is sustainable.
By the end of the day, the company had a market value of nearly $24.5 billion — about $105 for each of its 232 million active users — a ringing endorsement of an unproven business plan.
Analysts are already cautioning that, at about $45, Twitter shares are too high. Brian Wieser of Pivotal Research has already downgraded Twitter to “sell,” citing the price rise.
RBC Capital Markets analyst Mark Mahaney, who has fixed a $33 price target for Twitter, said that is hard for him to define this valuation as “anything other than rich.”
“I’d be awfully worried about buying a full position at $45,” he said.
But Cornell University professor Robert Jarrow said that pundits should think twice before pulling out the tech industry’s most-dreaded word — bubble.
Jarrow, a finance professor and expert in investment management, said that apart from an initial spike, Twitter’s first-day stock performance is more stable than a classic bubble.
“Bubbles tend to be associated with high volatility,” he said. “Twitter doesn’t appear to have the same price fluctuations.”
(Jeffrey P. Bezos, who owns The Washington Post, was an early investor in Twitter.)