Saturday, November 9, 2013

The biggest winner in Twitter’s IPO was Wall Street, not Silicon Valley - Why Did Twitter Choose the NYSE over Nasdaq?

The biggest winner in Twitter’s IPO was Wall Street, not Silicon Valley

Twitter left money on the table. Reuters/Lucas Jackson

Sure, Twitter’s IPO was fun. Guys in funny jackets were shouting. Captain Jean-Luc Picard rang a bell with some girl in a tutu. Twitter’s founders pretended not to hate each other. CEO Dick Costolo used so many buzzwords he ran out of breath. It was a carnival of capitalism.

Besides that, common shares of Twitter actually began changing hands without a glaring technical disaster. And the pop? Don’t even get us started on the pop! The shares priced at $26 on Wednesday night, and the stock finished trading on Thursday 73% higher. (At times during the day, it was up more than 90%.)

For San Francisco’s would-be Dorseys, who’ve embraced Twitter’s success as another indication their own inevitable day of triumph lay just around the corner, this is great news, right? Maybe. But for the the tech industry as a whole, Thursday looks like a decided loss to its long-time industrial rival: Wall Street.

Let’s go back to that “pop.” A first-day surge in shares has long been seen as a sign of a successful debut. And because of that, the Wall Street investment bankers who manage IPOs—by gauging investor interest—try to tilt the balance between supply and demand in order to generate the proper result when shares hit the market. In other words, they usually underprice the offering a bit.

But outside of the favorable optics, a first-day share price surge does precisely nothing for the company. That’s because Twitter gets its money the night before the stock starts trading publicly. (That’s when the stock “prices,” which means Twitter sells its shares to the underwriters and collects a check. In this case, the check was for $1.82 billion.)

But if you’re cynical, a big “pop” in shares isn’t a good thing. It’s a sign the company left a lot of money on the table. If people were so desperate to get the shares, the company could have charged more per share, and would have collected more cash in the IPO. Instead, an underpriced offering effectively puts a windfall in the hands of Wall Street underwriters, who can steer it toward the preferred clients who are granted access to shares through the IPO. (The shares typically end up with large institutions that send a lot of business Wall Street’s way.)

Why this is a loss for tech

Once upon a time, tech behemoths saw their IPO as yet another opportunity for innovation.

Starting in the 1970s, untested tech companies had a habit of going public on their own terms. They habitually listed shares on the all-electronic Nasdaq rather than the pricier, more restrictive NYSE. (The NYSE also had much more rigorous listing standards at the time.) As the tech industry grew, the habit stuck, turning the Nasdaq into the epicenter of the tech stock boom of the 1990s (and later, the bust).

When Google went public in 2004, it didn’t leave the pricing of the shares up to Wall Street. Instead, it turned to an auction-based IPO system and largely avoided sizable fees bankers had been salivating over for months.

And the tradition continued up to Facebook’s hotly awaited offering in May 2012. The social networking giant wrenched control of the offering out of the hands of its Wall Street bankers, repeatedly raising the price range and boosting the share count in the run-up to the IPO. The end result? Somewhat mixed.

Facebook got a seriously good deal on Wall Street, leaving little money on the table and forcing Wall Street underwriters to swallow a relatively skimpy 1.1% fee. (By comparison, investment bankers received 3.25% for their part in Twitter’s IPO Thursday.)

On the other hand, some blamed the stock’s wobbly start, in part, on the fact that there was little in the way of a positive pop. For three months, Facebook took took serious heat as its shares fell more than 50% and vaporized about $50 billion in shareholder value. Wall Street bankers knew just whom to blame. It was Facebook’s fault, they whispered.

Had Facebook’s offering gone smoothly, the firm’s hands-on approach to managing its offering might merely have been another example of how Silicon Valley justifiably refused to play Wall Street’s game. But it didn’t go smoothly. It was pretty much a disaster.

Facebook’s shares have more than recovered. But judging by Twitter’s IPO, the tech industry’s chipper attitude toward Wall Street hasn’t. Instead of the Nasdaq—which, fair enough, played a starring role in the Facebook mess—Twitter decided to list on NYSE, with all its quaint traditions, including involvement of actual humansin the trading.

And now there’s the pop. The shares closed up 73%. That’s the sixth-largest first-day surge on record. For a bit of context, between 1990-2009, the first day pop on an IPO averaged 22%, according to analysts from the Motley Fool.

Of course, it’s possible that Twitter’s top brass knew the shares were underpriced, but thought it a price worth paying for a successful offering. Or it could be that Twitter took more of a laissez faire approach to the entire process and left it in the capable hands of their underwriters. Either way, Twitter’s IPO was done on Wall Street’s traditional terms. And for an industry that boasts relentlessly about its ability to act as a disruptive force in American business, it’s hard not to see that as a loss.

-------------------------------------------------------------------------------------Chart: How Twitter IPO Compares With Facebook, Google, Others

Twitter finally released the details of its long-awaited plans for an initial public offering. How does the company stack up against Internet companies like FacebookFB -0.06%,GoogleGOOG +0.80% and others? Take a look at the chart below to find out. Click the chart to launch a fuller-screen version, or click here.

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From Chance Encounter, Path to Twitter Riches

Friendship Formed Foundation of 15.6% Stake in Social-Media Company

The largest stake in Twitter Inc. first came together seven years ago at a posh Caribbean resort.

On Necker Island, a retreat owned by billionaire Richard Branson, Suhail R. Rizvi, a little-known but well-connected financier, met Chris Sacca, a brash, young Google Inc.GOOG +0.80% executive.

Their friendship would later form the foundation of a 15.6% stake in Twitter managed by Mr. Rizvi's investment firm, Rizvi Traverse Management LLC. The journey to that stake—valued as high as $1.7 billion, based on Twitter's price range for its initial public offering—also included a convincing pitch to a Twitter co-founder and caged toy birds that resemble the social-media company's logo.

The zipper display on the Morgan Stanley building on Times Square in New York reads "WELCOME @TWITTER TO @MORGAN STANLEY" on Friday.Andrew Hinderaker for The Wall Street Journal

How the firm, led by Mr. Rizvi, accumulated that stake illustrates the changing rules of Silicon Valley investing. Traditional venture capitalists no longer are the only route into promising startups. Today, they are often joined, and sometimes jostled aside, by well-connected Silicon Valley insiders, who leverage their networks to buy chunks of sought-after deals.

The men made an odd pair. Mr. Rizvi was a quiet investor in big Hollywood deals who shied away from the cameras. Mr. Sacca was gregarious, with a fondness for Western-style collared shirts who was then writing a provocative tech blog. This account is based on interviews with several people with direct knowledge of the matter. A Twitter spokesman declined to comment.

Mr. Rizvi, 47 years old, an India-born financier raised in Iowa, didn't start off as a tech wizard.

An economics graduate of the Wharton School of the University of Pennsylvania, Mr. Rizvi began his career in private equity, primarily investing in real-estate deals. He waded into communications and technology in the 1990s, founding and eventually selling a long-distance telecom company and later buying a Puerto Rican company that he turned into a maker of telecom parts.

In 2004, his sights turned to Hollywood when he co-founded Rizvi Traverse, a firm based in Birmingham, Mich., with offices in Los Angeles and New York. It is best known for a string of high-profile entertainment deals, including the acquisition of a controlling stake in talent agency International Creative Management Inc. in 2005 (he was later bought out in 2012) and a partnership with Hugh Hefner to take Playboy Enterprises Inc. private in 2010.

After meeting in 2006, Messrs. Rizvi and Sacca regularly kept in touch, exchanging insight on technology trends and investing. Mr. Sacca, 38, who left Google in late 2007, had begun making small bets in startups like Twitter and Photobucket Inc., a photo-sharing site.

In 2010, Mr. Sacca was looking to buy more Twitter shares through his investment company, Lowercase Capital LLC. Once, that would have been difficult. But Silicon Valley customs had changed. As a startup gained traction and the value of its shares rose, some insiders hedged their bets, by selling portions of their stakes to deal-hungry outsiders. Mr. Rizvi suggested they team up to invest in the social-media company. Mr. Sacca would ply his Silicon Valley connections to find sellers, while Mr. Rizvi would recruit deep-pocketed investors as buyers.

That fall, Mr. Sacca approached Evan Williams, a Twitter co-founder who had recently been ousted as chief executive. Mr. Sacca knew Mr. Williams from his first investment in Twitter and his days at Google; Mr. Williams had sold a startup called Blogger to Google in 2003. Mr. Williams wasn't looking to sell, but Mr. Sacca said he could arrange a deal valued at hundreds of millions of dollars.

Mr. Williams eventually agreed to sell about 8% of Twitter at the time. He later sold more shares but retains nearly 57 million shares, a 10.4% stake, more than any other individual. Mr. Williams also remains on Twitter's board. He didn't respond to requests for comment.

Mr. Sacca picked up additional shares from other insiders. All told, the transaction would require about $400 million and value Twitter at almost $4 billion. To get that much money, Mr. Rizvi brought in J.P. Morgan Chase JPM +4.47% & Co., which had just created the $1 billion-plus Digital Growth Fund for tech investments.

The connection with Messrs. Sacca and Rizvi let J.P. Morgan offer its well-heeled private-wealth clients a slice of a hot startup. It also helped the firm better compete with rivals, likeGoldman Sachs Group Inc., GS +2.21% which made a major investment in Facebook Inc. in early 2011. The J.P. Morgan fund took a stake in Mr. Sacca's Lowercase funds, which acquired Mr. Williams's shares.

To complete the deal, the group needed Twitter's blessing, because the company had the first right to buy shares from Mr. Williams or other insiders. That would have required Twitter to come up with $400 million, at a time it needed cash to expand, or to identify another buyer with that much money. To ease concerns, Messrs. Sacca and Rizvi agreed not to seek a board seat, not to resell their shares and to vote their shares as the company directed.

Some venture capitalists were interested, too. In late 2010, venture-capital firm Kleiner Perkins Caufield & Byers also sought a way into Twitter. Partner John Doerr said his firm was ready to invest more than $150 million. But other Kleiner partners balked at committing so much of the firm's money to a single deal. Kleiner invested some $150 million but had to sell about $20 million almost immediately. Earlier Twitter venture investors stepped up to buy more shares.

When the Rizvi deal closed in early 2011, the investors celebrated with toys of a bird in a cage. The size of the investment from the J.P. Morgan fund was still in flux: The gifts came with stickers for the ever-changing deal value. For his part, Mr. Sacca handed out cowboy shirts to everyone at the gathering.

The J.P. Morgan fund later bought additional shares, bringing its investment to nearly 49 million shares, or a 9% stake in Twitter. Those purchases went through the Rizvi funds, so they also are counted in the Rizvi Traverse stake.

Mr. Sacca continued to buy Twitter shares, too, through investment vehicles with names like Compliance Matter Services and Institutional Associates Fund. Several of those funds initially were operated by Mr. Sacca and Lowercase Capital, according to securities filings; in 2012, they were reassigned to Rizvi Traverse, which is larger and better equipped to manage billions of dollars. However, Mr. Sacca retains an economic interest in those funds.

Once the outsider, Mr. Rizvi has leveraged his Twitter connection to spawn other transactions. He created other Twitter funds without Mr. Sacca, including one backed byKingdom Holding Co. 4280.SA +0.45% , the investment firm controlled by Saudi Prince Alwaleed bin Talal. He also has made other investments in Silicon Valley and now holds stakes in Square Inc., the payments company led by Twitter co-founder Jack Dorsey, and Flipboard Inc., a digital news reader.

As with Twitter, Mr. Rizvi wrote big checks to gain entree to later stage startups. His 2012 investment in Square, for example, valued the company at roughly $3.25 billion. It isn't yet profitable; then again, neither is Twitter, according to its filings.

Write to Evelyn M. Rusli at evelyn.rusli@wsj.com

Source : By Matt Phillips,ttp://qz.com, http://blogs.wsj.com, online.wsj.com, By