September 14, 2013

Analysis: Twitter learns several things from famous Facebook flop

The smaller and younger social-networking rival will price its IPO less aggressively, for instance.

By MICHAEL LIEDTKE The Associated Press

SAN FRANCISCO - Twitter is so deeply ingrained in the cultural conversation that its initial public offering is likely to be a hot topic on its trend-setting service for the next few months. Its stock market debut is also likely to be the most scrutinized coming-out party since Facebook went public in May 2012.

Facebook's flop made an impression on its social networking rival. Here are four signs of the Facebook influence on Twitter:

LESSON 1: Take the road less traveled.

IPO submissions to the Securities and Exchange Commission typically include exhaustive financial information and other sensitive details. By taking advantage of the regulatory changes introduced since Facebook went public, Twitter is giving investors, the media and would-be competitors less time to pore over its IPO documents.

Twitter gained the wiggle room under a law passed last year shortly before Facebook completed its IPO. Called Jumpstart Our Business Startups act, the law allows a company with revenue below $1 billion to file its IPO papers with the SEC confidentially. This allows the documents to remain secret until 21 days before the company starts marketing the deal to investors -- a ritual known as a "road show."

By reducing the amount of time that its filing information is available for public review, Twitter is hoping to minimize the nitpicking over its business model. Like other high-profile companies that have gone through the standard IPO process, Facebook had to endure more than three months of second-guessing about the information contained in its documents. At the same time, the company couldn't respond to criticism or misleading interpretations of its filings because of an SEC-enforced "quiet period" that restricts what management can say before an IPO is priced.

LESSON 2: Work the numbers.

Twitter is going public as a younger and smaller company than Facebook Inc., making it easier for the company to generate the kind of robust growth in revenue that tends to excite investors.

Facebook was eight years old by the time it went public and had already built such a large business that it was more difficult to speed its pace of growth from one quarter to the next. In its final year before going public, Facebook had annual revenue of $3.7 billion -- more than twice as much as Google did when it went public in 2004.

In contrast, Twitter is only seven years old and didn't even start to generate significant revenue until 2010. Research firm eMarketer estimates that Twitter had $288 million in revenue last year (the actual figure will be revealed once the veil lifts off the company's IPO documents).

Because it still has a relatively small financial base, it won't be surprising to see Twitter's revenue more than doubling from the previous year for several quarters after its stock starts trading, PrivCo analyst Sam Hamadeh predicted in a research note.

LESSON 3: Leave some money on the table.

Twitter won't price its IPO as aggressively as Facebook did, says Hamadeh. That increases the chances of Twitter's stock rising once it begins trading. He expects Twitter to set its IPO at a price that values the company at about $15 billion. That's up from an estimated value of $10 billion, based on the money Twitter has raised from venture capitalists and other early investors.

Facebook kept raising its IPO price until the company was valued at $104 billion, or about four times Google's valuation when it went public in 2004. Facebook saw its stock plunge from its IPO price of $38 to below $18 within four months of its IPO amid concerns about its slowing growth and ability to sell ads on mobile devices.

LESSON 4: Timing is everything.

Many analysts thought Twitter might wait until next year to go public, but the stock market's appetite for social media companies has never been hotter. With the company's revenue growth picking up again, Facebook's stock has surged by more than 60 percent in less than two months. Meanwhile, LinkedIn Corp.'s stock has more than doubled so far this year.

Even Facebook CEO Mark Zuckerberg has gotten over his one-time aversion to going public, telling a technology conference earlier this week that the IPO process made Facebook a better-run company.

 

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