Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

3 ways Twitter's IPO won't be like Facebook's

October 7, 2013: 11:03 AM ET

No one wants to live through that again.

By Joshua Morgan Brown

twitter-ipo-620xaFORTUNE -- If the modern financial media had been around in 1858, while Cyrus West Field was laying the first transatlantic telegraph cable under the ocean, we'd have been treated to hundreds of screeching headlines about the project's lack of immediate profitability -- rather than marveling at the instantaneous connection being established between two continents. I think there is a similar disconnect between the skepticism with which Twitter will be viewed in the near term and the miraculous nature of what it has actually built.

I'm not going to make a prediction about what the Twitter IPO will do in its first days of trading. I will, however, disclose my plan to buy shares for my own personal account in the secondary market, pretty much no matter where it opens up. I'm giving you my bias upfront so that we can dispense with any suspicion and make some important points here.

I've said consistently for three years now that Twitter is a one-of-a-kind, global information utility that probably will not be replicated or challenged any time soon. It's changed the world culturally and politically, and its creators have barely even scratched the surface in terms of what it might be capable of for business purposes.

Twitter shares may trade lower or higher upon coming public as market mechanics and The Street's myopic perceptions manifest themselves in the stock's valuation. I plan to ignore most of what I hear because I want in for the future, and I'm willing to risk that my initial buy-in price is too high.

By the way, I don't recommend that anyone else invest this way. It's pretty reckless and unconventional, but I have a different game plan than most.

MORE: Is Twitter the end?

The key point I want to make here is that what happened with Facebook (FB) in May of 2012 has no bearing on what will or won't happen with Twitter. Retail investors will have difficulty seeing the difference between the two events. The media will also struggle to separate them because "Here we go again!" is a classic journalism trope that practically writes itself.

I believe the press will mostly be wrong in relentlessly making this Facebook-Twitter comparison, as they inevitably will. Everyone's got a pageview quota to fill, and potential bad news travels faster than a moderate forecast. In my view, Facebook's poorly-executed IPO won't matter for Twitter's precisely because of the lengths The Street has gone in distancing itself from that embarrassment. I would point out that Twitter itself has gone to great pains to distinguish its coming offering as well. In addition, we know that the exchanges will also be exceedingly more vigilant and alert to potential hiccups, regardless of which the company chooses to list on. Finally, the media hype machine will be more subdued than last time -- and certainly more chaste.

Below are three things that will absolutely not happen with Twitter's IPO ...

Dumping stock on Mom and Pop

Morgan Stanley (MS) won't lead the deal, although it will play a big part in the syndicate. Twitter's gone with Goldman (GS) -- which means the lead underwriter isn't attached to a massive retail brokerage salesforce. Given what will be the deal's likely size, retail brokers will get allocations, but they won't have stock dumped on them like they did with Facebook.

Any broker will tell you that the kiss of death on a new issue is whenever you're actually being granted the size you had indicated for. In my prior life as a broker, any time I had submitted a request for X number of shares for clients and the answer came back, "Yes, okay," it was a sure sign that the deal was doomed.

MORE: Silicon Valley's startup founder problem

I'd also like to point out that Dick Costolo, Twitter's CEO, should be commended for keeping a tight handle on shares, unlike the Second Market swap-meet environment that surrounded Facebook's debut. Executives have been barred from selling shares, and the private stock that is out there is said to be fairly consolidated. It helps Twitter's aftermarket prospects that Facebook's stock has now recovered its initial losses and has been steadily bolting higher. It's no accident or coincidence that Twitter's filing wheels began to turn at the exact moment Facebook reclaimed its opening price during the last week of July.

Hyping up the deal

Thank the Lord I wasn't on CNBC's Fast Money the night the Facebook IPO priced because they made Melissa Lee and the four traders who were on the show all wear hoodies. Once the share price had been cut in half, all that exuberance turned to regret rather quickly. We still tease each other about it in the green room to this day. The New York Post made the Fast Money hoodie incident infamous, going so far as to blame the show for the deal's failure.

There will still be plenty of hype about the public offering, mostly owing to the general journalistic obsession with the Twitter service itself, but nowhere near on a par with FB. Besides, Twitter has a user base of just 200 million, not the billion-plus Facebook went public with.

Last-minute glitches and hitches

A few days before the Facebook IPO, analysts at the very investment banks that were underwriting the offering began to whisper in the ears of select institutional clients that revenue expectations for the company were a tad too aggressive. This kind of thing was absolutely unheard of. Long-time market watchers were just gobsmacked; they had never seen anything like it, a complete and total betrayal to the whole idea of the thing.

Once that word began to make the rounds, all of a sudden there were a lot more first-day flippers and even outright cancellations of allocation requests from institutions and hedge funds all over the country. The hottest IPO of the decade went ice-cold in the last few hours before trading, unbeknownst to the press or the exchange itself.

MORE: When angels reach too high, startups can fall

These rapid-fire cancellations and sell orders only exacerbated the overloaded Nasdaq open, which made things even more chaotic. By the time the market had closed that day, the IPO price was just barely defended, and millions of shareholders, traders, bankers, and Facebook employees were utterly demoralized. In the meantime, Facebook's boy-king Mark Zuckerberg was honeymooning in Italy (photographed, inexplicably, eating at a Burger King) while billions of dollars evaporated here in New York. The finger-pointing free-for-all in the deal's aftermath will probably never be forgotten.

No one -- and I mean no one -- wants to live through that again. This time around, you can bet that the exchanges will make a smooth opening a life-or-death priority and that Wall Street's analysts will be on their best behavior in the days leading up to the IPO.

Bite your tongue, boys.

Joshua Morgan Brown is CEO of Ritholtz Wealth Management and author of The Reformed Broker blog. Follow him on Twitter @reformedbroker.

Join the Conversation
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.