Twitter's IPO Managed Differently Than Other Tech Stocks

What makes an initial public offering a success? Twitter is going the old school route, pricing its shares modestly in hopes of a pop in early trading. The company will go public on Thursday, and the banks they've hired to help are some of the oldest and most well established in the country.

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RENEE MONTAGNE, HOST:

It's MORNING EDITION, from NPR News. Good morning. I'm Renee Montagne.

STEVE INSKEEP, HOST:

And I'm Steve Inskeep. Twitter is going public tomorrow, an initial public offering of stock - an IPO. And if there's one message the company's executives want to get across in the lead-in to that IPO, it's this: Twitter is not Facebook.

NPR's Steve Henn reports.

STEVE HENN, BYLINE: In many ways, Twitter is planning an old-school IPO. Unlike Apple, Microsoft and Facebook, it's not going to be listed on the tech-heavy NASDAQ. Instead, it's going with the staid New York Stock Exchange. The banks Twitter's hired to take it public are some of the oldest and most well-established in the country. And when Twitter first proposed a price for its IPO, it signaled to investors it was looking for a first-day pop.

NEIL STEWART: Well, the holy grail of equity capital markets is a nice pop on opening day.

HENN: Neil Stewart's the research director for Investor Relations magazine. A pop is when a newly IPO'ed stock shoots up on its opening day of trading. These pops were what made Internet IPOs so appealing back in the days of the dot.com boom. For investment bankers, a pop is a pretty helpful thing.

JOHN KOLZ: Hi. My name is John Kolz. I'm a managing director at Credit Suisse, in equity capital markets.

HENN: Kolz's job is to drum up investor interest in new IPOs. He approaches the same big investors before shares start selling to the public again and again. These relationships are the bread and butter of his business. And a nice, predictable pop on opening day keeps big investors happy. But Facebook fizzled.

STEWART: Yeah, it was botched.

HENN: Neil Stewart says Facebook sold so many shares at such a high price, it glutted the market for its stock.

STEWART: It was a shambles, in the end. It took a year to climb back to its IPO price. It disappointed a lot of people. It was probably pretty hard within Facebook to keep their heads down, working away, when all of that was going along.

HENN: Recently, Mark Zuckerberg was asked if he had any advice for Twitter on the eve of its IPO.

MARK ZUCKERBERG: See, that's funny on its surface because I'm kind of like, the least - the person you would want to ask last how to make a smooth IPO.

(LAUGHTER)

HENN: Zuckerberg jokes about it now, but it's probably not fair to call Facebook's IPO a complete failure. The company raised billions of dollars, on great terms. And today, its investors - assuming they held onto their stock - are doing great. In fact, there's a school of thought - especially on the West Coast, and especially among entrepreneurs - which believes that a big, old-school pop on the opening day of an IPO is actually a really bad thing.

BILL HAMBRECHT: When I try to think when did I first start questioning the system, to be honest, the first time it really - someone brought it home to me, was in the initial pricing of Apple Computer, in 1981.

HENN: Bill Hambrecht is an investment banker based in San Francisco. He's been helping tech companies go public for years, including Apple, Amazon, Genetech and Google. He says a pop doesn't benefit tech firms. It benefits Wall Street.

HAMBRECHT: Steve Jobs figured out very quickly how Wall Street worked. And he really questioned: Hey, why do you price it at 18 when you know it's going to sell at 28? And why do you charge me a 7 percent commission? And, you know, who gets that stock at 18? I mean, you know, why not my friends? Why your friends? I mean, he questioned the whole process.

HENN: When founders underprice an IPO, money that could flow into a fledgling company to finance growth goes to Wall Street insiders instead. And in the last year, five companies that went public saw their stock price shoot up more than 100 percent on the opening day of trading. Hambrecht says that's not a sign of success. It's a disaster.

HAMBRECHT: To me, we've been trying to say, hey, you should really approach this as anybody would who's selling any asset. Find the fair price.

HENN: Hambrecht says imagine for a second that you sold your house to a friend of your real estate broker. And then you found out afterward that guy flipped your house, less than an hour later, for twice the price.

HAMBRECHT: You'd probably want to send the broker to jail, particularly if you found out he got part of that profit back in other business.

HENN: Too often, Hambrecht says that's how so-called successful IPOs actually work. So he says if Twitter's stock price shoots to the moon tomorrow, it's actually a sign Twitter lost out.

Steve Henn, NPR News, Silicon Valley.

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