No, getting a high price for its shares wouldn’t be a disaster for Twitter


Dick Costolo, chief executive Twitter gives a speech at TechCrunch Disrupt SF 2013 technology conference in San Francisco this month. (Reuters/Stephen Lam)

When you're selling something to the public, do you want to get a high price or a low price? Most people would say "high." But when it comes to the Twitter IPO, a lot of people get this backward.

Bloomberg, comparing Twitter's pending public offering to Facebook's high-profile market debut last year, writes that "the microblogging service is making sure to avoid some of its rival’s pitfalls." The New York Times describes the Facebook IPO as having been "disastrous." Specifically, Bloomberg says Twitter has filed its IPO document in secret  to "avoid the hype that led to Facebook pricing its offering at 107 times trailing 12-month earnings."

But that's silly. Getting investors to pay a high price for your shares isn't a "pitfall." It's a windfall.

Facebook priced its shares at $38 when it first offered shares to the public on May 18, 2012. But the price soon started sliding, falling below $30 before the end of that month and below $20 by that August. (As of midafternoon Friday, Facebook shares were priced at $44.39.)

If we assume the fair market price of the shares was around $30, then the social networking giant reaped around $8 extra for each share it sold. And Facebook sold a lot of shares: 421 million of them. So this allegedly disastrous transaction earned CEO Mark Zuckerberg and other pre-IPO Facebook shareholders something like $3 billion in free money.

Of course, it's unethical for a company, or its broker, to mislead investors into overpaying for its shares. And federal regulators have charged that that occurred in the Facebook IPO. Morgan Stanley, the bank that managed the IPO, was eventually forced to pay a $5 million fine for trying to "improperly influence" market analysis in the days before the IPO.

But while you shouldn't mislead investors, it's perfectly legitimate for a company to try to get the highest price it can, honestly, for its shares. After all, the whole reason investors buy stock in an IPO is that they think the price will go up in the days after the offering, making the investor a profit. These investors can hardly complain that sometimes the opposite happens and prices go down instead.

So if Twitter makes accurate and complete disclosures to investors, and investors are still willing to pay a ludicrously high prices for its shares, there's nothing wrong with taking investors' money. And deliberately downplaying your company's successes in order to discourage hype means leaving money on the table for no good reason.

 

business/technology

the-switch

Success! Check your inbox for details. You might also like:

Please enter a valid email address

See all newsletters

Comments
Show Comments
Most Read Business

business/technology

the-switch

Success! Check your inbox for details.

See all newsletters

Next Story
Brian Fung · September 13, 2013

To keep reading, please enter your email address.

You’ll also receive from The Washington Post:
  • A free 6-week digital subscription
  • Our daily newsletter in your inbox

Please enter a valid email address

I have read and agree to the Terms of Service and Privacy Policy.

Please indicate agreement.

Thank you.

Check your inbox. We’ve sent an email explaining how to set up an account and activate your free digital subscription.