Commercial awareness: think like a professional about... #twitterIPO

Our banker, lawyer, accountant and consultant on the latest high-profile technology flotation

The social media giant Twitter has gone public, listing its shares on NYSE for the first time on 7 November.

Twitter's shares were initially priced at $26 (£16) each, representing a valuation of the company at $18 billion. After the first day of trading, however, the share price had soared to $44.90, a 73 per cent increase in value, meaning that the company had a stock market value of over $30 billion. By the end of the second day of trading, Twitter's share price had fallen slightly to $41.65, but still stood significantly higher than its IPO price.

The decision of Twitter's management team to list on NYSE rather than the technology-orientated NASDAQ was seen as slightly surprising. But their decision appears to have been a good one - as well as being pleased by the market's vote of confidence in their business indicated by the rapid rise of its share price, they'll have been relieved that the IPO was not marred by the technical difficulties that affected competitor Facebook's IPO in summer 2012.

The IPO represents the coming of age of the Silicon Valley-based business, which launched in March 2006 and now has 200 million users. Its IPO is the latest in a string of high-profile technology IPOs that have taken place in recent years. As well as Facebook's flotation last year, the market has also seen listings from LinkedIn in May 2011, Farmville creators Zynga in December 2011, and Groupon in November 2011.

Goldman Sachs was the lead underwriter on the IPO, with assistance from J.P. Morgan and Morgan Stanley. Between them they will share a fee pool of nearly $60 million. Technology and entrepreneurship specialists Wilson Sonsini Goodrich & Rosati gave Twitter legal advice on the listing.

Thinking like a...


Underwriters right?

On any big IPO the initial share price set by the underwriters is subject to analysis and, sometimes, criticism. In the case of Twitter's IPO, the underwriters have been accused of setting it too low, given the subsequent significant jump in the price of the shares. They've also been accused of setting it too high, given that Twitter has arguably yet to confirm its business model truly has monetisation potential. Some commentators have distinguished price and value, saying Twitter has been "priced" by reference to market demand for its competitors rather than truly "valued" in terms of its business. Only time will tell how much Twitter's really worth...


Twitter twits

As Twitter has grown, it's developed from being a fun message facility into an important tool for many businesses. However, as they're particularly cautious folk, lawyers have been quick to warn their business clients about how quickly using Twitter can backfire - for example, you could find your brand being misused, fall foul of employment legislation, or breach defamation law. As these issues become more and more high-profile and more and more costly to fix, we could see businesses shying away from Twitter, which is worrying for it as it can't make a profit solely on pictures of your breakfast.


The bottom line

For conventional businesses, having lots of fans of your product generally translates into lots of profit. However, like many technology businesses, Twitter is extremely popular, but doesn't make significant amounts of money. In fact, it's yet to make a profit at all from either of its two main revenue streams - advertising, and selling its "firehose", its vast and constantly expanding bank of archived tweets and user information. LinkedIn and Facebook, by contrast, were both making money at the time of their IPOs. However, most accountants would acknowledge that Twitter's business model has significant potential, and that's worth something, if not as much as hard cash.


Give them credit

Strategy consultants, the big-picture thinkers of the consulting world, often advise businesses on what their future strategy should be. So if I were advising Twitter, what would I say? Many commentators think the natural next step for Twitter's money-making efforts is to move beyond advertising products and services that users buy elsewhere to enabling users to buy those products through the social media platform itself. So in the future, your late-night tweet about being hungry as you watch a movie could prompt a pop-up ad for a pizza that you can buy in one click with "Twitter credits", netting the business a fat fee.