Underpricing Twitter's IPO: Smart move?


Just one month ago, Wall Street helped yet another member of Silicon Valley to raise capital. Twitter Inc, the innovative, ground-breaking social media phenomenon decided to issue shares to the public in a form of an IPO (Initial Public Offering) as to raise capital for its yet – to – profit business. Wall Street’s big names such as Goldman Sachs, Morgan Stanley, and JP Morgan all helped to underwrite their offering, with the first being the “left lead”, taking the prime role in the IPO. 

The result? USA Today called the IPO a “huge success” and the Times mentioned that Twitter had “managed to avoid the missteps that marred Facebook’s initial public offering last year“. Anthony Noto, the Goldman Sachs banker who led the IPO tweeted “Phew!”, revealing just the huge relief off his shoulders after managing a successful IPO. TWTR opened with a price of $26 a share, and ended the first day at $45, which is a 70% surge in price, making it the sixth highest surge in the IPO history. 


A roller coaster ride for our darling chirpie

If we look at the price tag, we can say that Twitter underpriced itself. The micro-blogging company could have bagged $45 x 70 million = 3.1 billion instead of $26 x 70 million = 1.82 billion. We know that the aim of an IPO is to gather as large capital as possible from the larger public, so that the company can reinvest in itself and develop technologies that can improve its business. The huge surge did nothing to achieve this as Twitter obtained its money (that is $1.82 billion) the night before the trade, when they sold their shares at $26 each to the underwriters. 

The big question here is who’s the biggest winner from Twitter’s IPO? While we know that it’s probably not Twitter, the answer might not be so surprising: the people at Goldman Sachs. Let’s look at this case from the point of view of the world’s arguably most prestigious investment bank. Goldman Sachs, like many other companies, prides itself in putting their clients first. In the IPO, Goldman Sachs clients are two fold : Twitter and their individual investors. 


Even though Twitter did not bag as much capital as they could have and left so much money on the table, monetary benefit is not the only benefit out there. We also have to take into consideration the long-term benefit of a successful IPO and the goodwill to its shareholders.

Learning from Morgan Stanley’s struggle in keeping Facebook’s share price at the offering (they themselves had to buy the shares to keep the price floating above $38!), the guys at Goldman Sachs kept the Twitter’s price at a modest tag. It’s like satisfaction management: if you keep the expectation low enough, you will capitalize higher satisfaction at the end. Whether or not they saw the huge surge coming, their tactic worked. The price surge and high valuation made the headlines of almost all leading newspapers, positively contributing to Twitter’s image. As the stock market based its valuation on information, gaining a positive information is paramount. 

When asked about the underpriced shares and the fact that it left much money on the table, Twitter and its advisers “judged that the additional money wasn’t worth what could have been sacrificed had they priced it higher, namely good will with long-term investors who they hope will buy more shares in future offerings.” Indeed, the folks in Twitter are not just modest but also forward looking. 


The direct beneficiaries of this offering is of course the investors, the happy clients of the bank. They are the ones who will be basking in the price surge, buying the shares at $26 on Wednesday and selling them at $45 the next day. 

Goldman Sachs

Both Twitter and the happy investors are direct clients of Goldman Sachs. By benefitting them (one way or another) the investment banks is benefitting itself. A spokesman for Goldman Sachs, told Vauhini Vara from The New Yorker, “Our sales teams naturally make an effort to understand how client trading strategies perform over time. That’s an essential part of good client service, and clients, of course, consider their investment results when deciding whether to do more business with Goldman Sachs or any other firm.” Yes, they said it themselves! Satisfied clients means more business. For corporations who are looking to do an IPO, Goldman Sachs has closed the deal for Twitter in a fashionable way. For individual investors looking to gain from their investment, Goldman Sachs has benefitted the Twitter’s investors millions of dollars. The firm has built a strong reason for clients to use their service in the future. 

Besides the stated benefit above, the banks also reaped revenues in the form of fees, which in this case is 3.25% out of the total $1.82 billion (this pool is later on divided amongst Goldman, Morgan Stanley, and JP, with Goldman claiming the highest share). While it is the smallest fee rates among US IPO in 2013, again, the banks were still willing to undertake the high-profile project in the hope of generating future businesses. 

Another win for Goldman Sachs is its come back in the IPO war with competitors such as Morgan Stanley. Goldman has rebalanced itself as a serious leader and competing against Morgan Stanley, who dominated the tech IPOs. According to Bloomberg, Twitter’s IPO is the largest that Goldman Sachs has led for a U.S. technology or Internet company, data compiled by Bloomberg show. Taking the prime spot in Twitter’s offering has helped the investment bank to bounce back after losing the spot on social-media IPOs from LinkedIn to Facebook. 

While it is still too early to predict whether the underpricing is beneficial towards Twitter, I think everybody agrees that Goldman Sachs emerges as the clear winner. 


Applause, Applause, Applause 

Note : all photos are not mine. Sources are recognized through hyperlink. 


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