A slightly humorous Twitter IPO explainer.

Courtesy of the Guardian (that bastion of capitalism).

D'oh! Wrong Tweeter.

Amazingly, people were trading Tweeter Ent Symbol:TWTRQ recently thinking that they were getting a head start on Twitter.

As Finra points out, the Q at the end of the symbol often indicates bankruptcy status.   So this isn't the Twitter you are looking for.  The stock now trades as THEGQ.

Money left on the table at Twitter.

Twitter [TWTR] went public today.  The asking price was $26, but the stock immediately traded up and is now trading at close to $50.

So is this good news or bad news?   

The answer, of course depends on who you are asking.

From Twitter's point of view, they sold the stock cheap - very cheap.  The stock was underpriced by about $45-26 = $19 per share.  As they sold about 70 million shares today, the total underpricing was roughly $1.3 Billion.   This is sometimes called the "Money left on the table" and by any measure, this is a pretty big sum.   Jay Ritter of the University of Florida, keeps track of these things and has a nice summary of past IPO underpricings.  In 2012, the total left on the table for all IPOs was about $2.78 Bn, but this is dwarfed by the height of the tech bubble in 1999 when the total was $36 Bn.

From the people who bought the IPO - this turned out great.  And we're not talking about people trading the IPO this morning - we're talking about those who were allocated shares by the Investment Banks.   These investors saw a huge one day return.   But there is a dark side here - as there is plenty of evidence that Investment Banks give allocations of these desirable IPOs to their best clients.  So Twitter's shareholders have given up a huge chunk of cash to so that the IBs can provide a nice present to their clients (beats a set of golf clubs or Frozen turkey for Christmas).  This practice (giving your clients IPO allocations) is called spinning.   Prof Ritter writes about it here.   

So by my counting, the score card is Twitter 0, IBs and their clients $1.3Bn

The next question then is how much is TWTR worth?

At $26, twitter has raised about 1.82 Bn.  But the company has about 575 million shares outstanding (most of which are not part of the initial IPO.   So Twitter has only sold about 12% of the company to the public at this point.   The valuation at IPO was about $26*575M = $15Bn.  But at the price above, the valuation is closer to $49*575M = $28Bn.  It is likely that Twitter will conduct further equity issuances over the coming months, gradually increasing the amount of shares held by the public, and raising more cash as it does.

Finally, what about those traders who bought the IPO at the higher price today?  

What does the future hold for them?    Of course we can't predict what TWTR stock will do, but the evidence shows that buying an IPO stock at the first day closing price is a terrible investment.   On average they underperform the market over the next 3 years by 19% per year.  But larger IPOs do fair better, so there may be some hope (Facebook is doing pretty well).   That said, I will stick with my Index Funds.

Why is Chrysler filing for an IPO?

A strange situation has developed at Chrysler, where the company has reported that it is filing for an IPO, even though its majority owner, Fiat, is in opposition to the filing.

So what's going on?   Back in 2007, the big 3 automakers created something called VEBA -a trust that allowed the firms to transfer their retiree healthcare benefit obligations to the UAW.   All was well, until the financial crisis "carpocalypse" and the UAW had to take shares in GM and Chrysler instead of cash because these automakers were broke.   Now the UAW wants to cash out, but is unhappy with the price being offered by Fiat - hence the IPO (the VEBA arrangement allows the UAW to push for an IPO).   The UAW is hoping that the IPO will result in a higher price than what Fiat is offering.  

Fiat isn't happy because a higher valuation will mean that it has to pay more to buy out Chrysler's share of the VEBA fund.  But, the UAW could lose out though if the valuation comes in lower.

Either way, Fiat and the UAW are playing chicken.  This should be interesting, but there's a good chance this IPO will never happen.

Groupon - even our stock price is low!

So what's up with one of the hottest IPOs of last year - Groupon?

Ouch.  That doesn't look good.

Aswath Damodaran takes a close look at whether GRPN is a bargain or in a death spiral.  I'd say the latter.

Readers of this blog probably aren't surprised that most IPOs do badly.

Facebook's growth (or lack thereof).

According to a recent article in the Wall Street Journal, the growth rate of Facebook is slowing quite dramatically.  This is quite normal for large companies - as when they get really big it just becomes a lot harder to grow at a fast rate.  In fact apparently 71% of all internet users in the USA are already on Facebook - so any further growth here either has to come from trying to persuade the other 29% to get on board, or to get the current users to click on more ads.

For Facebook this matters a lot.   FB's PE is around 70 compared to Google's which is around 17.  For FB to have the same valuation as GOOG, it will need to more than quadruple its earnings, or see its stock price drop to single digits.   My guess is that the end result will be somewhere in the middle.

Facebook still has some way to go...down that is.

FB closed around $29 today, but probably has some way to go according to Mark Hulbert.  Hulbert bases his analysis on a study coauthored by my dissertation adviser, Jay Ritter, who is an expert on all things IPO.  The conclusion of the analysis:  Something around $13 would be more reasonable.   Ouch.

HT: Reformed Broker.


On a separate note, Felix argues that the FB debacle should be of concern to all of us.


And finally, perhaps we should short it - here's the simple guide to shorting an IPO.  HT: Finance at Tepper

Even more on the ugly side of Facebook's IPO

A nice article about the under-pricing that usually occurs for IPOs (but didn't occur for FB).  With quotes from my dissertation adviser, Jay Ritter, and another excellent finance researcher, Jacqueline Garner (who's a friend of mine).

Kid Dynamite doesn't feel a whole lot of sympathy for people who participated in the offering...

My expectations for a huge first day pop were already tempered, but I kept my order for two reasons:
1) I was curious as to how retail investors would be treated, given the fact that the Syndicate seemed to be upsizing the deal to satisfy more demand  and
2) I was a greedy pig clinging to the hope that I might get some free money shares – allocated IPO shares that would get a nice first day pop.  

And here’s why this IPO was successful:  because all of us greedy, ignorant retail investors who were willing to buy Facebook at any price  STILL had every chance to escape with our hides intact.

And finally, it looks like FB may have behaved quite badly - and possibly violated Reg FD (a rule that prevents management from disclosing material information to only a select few investors).  Joshua Brown has the story.

What does price support look like?

My colleague, Bart, sent me this screen capture of yahoo finance at 4pm on Friday.   This is what price support looks like.

More on Facebook...

Felix Salmon talks about the Greenshoe, although he gets it slightly wrong (a rarity for Mr Salmon).  The Greenshoe is the option to sell an extra 15% of the issue, it isn't about shorting the issue.   The SEC allows the underwriters to take a naked short as they are making a market in the new IPO stock.  It is the combination of these two things where the financial magic happens (see my Friday post).


From Twitter:

Link



From Business Insider:

"ZUCKERS"

Facebook - the hangover.

As I said on Friday, Facebook was going to trade below $38 today (Monday), sure enough:

This is probably the first, and last time that I will correctly call a stock price movement.

Facebook and the Greenshoe option.

On Friday, Facebook's IPO provided us with a fascinating case study on the effects of price support.

Here's the graph of the stock price for the day (note that it didn't start trading right away because of a snafu with Nasdaq's computers).

You'll see that the price basically bottomed out at $38, but never went below $38, which is where the price support kicked in.

With new buyers of the stock trying to sell, the underwriters posted massive buy limit-orders at $38 (a limit order is an order to buy at a specific price).  Known as "price support" in the jargon (or more politically correctly "price stabilization") this is part of the underwriting service which, in exchange for their fee, the underwriters pledge to try to keep the price at or above the initial offer price.  Doing so  ensures that shareholders who bought the stock at the initial offering don't get taken to the cleaners which would be bad for everyone.

You can see the effect of the underwriting support here - where there is a huge block of trades right at $38 and the result of the "epic battle" here.

You might be thinking that the underwriters just got the short end of the stick here - they've had to buy huge amounts of the stock at $38, knowing full well that the stock is likely to go down further on Monday when the market opens again.  But you'd be wrong.   At the end of the Friday, it is unlikely that the underwriters are actually holding any Facebook stock.  

The way the underwriters do this is to use two tricks.  First is the Greenshoe option (named for the company where it was first used, which is now StrideRite).  The Greenshoe, or more technically, over-allotment option lets the underwriter sell 15% more shares than are listed in the offering.  The second trick is that the underwriter is allowed to sell shares that it doesn't own - it can create a naked short position - so in effect, 15% of the shares sold to the public don't actually exist.  (a naked short is when you sell something you don't own, as opposed to a regular short where you first borrow the stock and then sell it.)

So the underwriter has sold 15% extra shares (which don't exist!).   If the price goes up, then the underwriter will exercise the Greenshoe option and get another 15% of real shares from the issuer to cover those naked short shares.  But, if the price falls, as was the case for Facebook, the underwriter will just start buying back shares to cover the naked short.   In theory the underwriter can buy back 15% of all the shares issued,  and at the end of the day have a net position of zero.

The flexibility of being able to take a naked short position combined with the Greenshoe option ensures that the underwriter can provide aggressive price support without actually having to end up owning a ton of stock.

But on Monday it will be a different story.   Once the underwriters have exhausted the 15% that they shorted, they will be unlikely to take one for the team and continue to provide support.   My prediction is that the price will fall, because fundamentally, I don't think Facebook is worth $100 billion.

Is Facebook fairly priced?

So here is my valuation of Facebook.

Based on trailing earnings of $1 billion and an expected market cap of $100 billion we get a trailing PE of 100.

As a comparison, Apple's PE is about 13 and Google's is 19.

It's really not worth spending much more time on this. Facebook is likely to be crazily overpriced.

The next question (as posed to me by my friend Robert) is : "do we short or buy puts?"

Facebook IPO - yawn...

In case you've been living under a rock, Facebook's IPO is scheduled for Friday.   As Felix Salmon notes, there has been much talk about whether you should buy some of the stock.

Let's be clear here.  For individual investors, it will near impossible to buy the IPO at the issue price.  But to buy the IPO at the post issue price (once it begins trading) is a bad idea.   History shows that on average, IPOs purchased on the first trading day significantly underperform similar stocks in the long run.

Just stick to indexing.

I've posted a lot on this before - here

Why the IPO is broken.

Most firms that do IPOs now don't really need the money - they are just forced to go public.   Excellent article in Wired.

Facebook paying 1.1% underwriting fee

Apparently Facebook has cut a sweet deal on underwriting services for its upcoming IPO and is only paying 1.1%.  This is in contrast to the typical fee which is around 7%.[link to a pdf].

HT: Thomas (a student in the Advance Analytics program at NCSU).

Fender going public

Fender, the maker of guitars including the Stratocaster and Telecaster is going public.  The last time Fender was publicly owned was during its ill fated period as part of CBS.  Fender aficionados still talk about that episode in the company's history.

Beer and IPOs

An article on IPOs and Beer.

A Facebook valuation

Aswath Damodaran puts together an excellent valuation of Facebook.

If you're interested in equity valuation and in developing analyst skills, you could do a lot worse than to carefully study Prof Damodaran's work.

The Facebook halo effect...

OK I didn't see this one coming ... LNKD spikes up on Facebook's IPO filing.