Posted on 07 July 2013.
The Twitter IPO is one of the most highly anticipated Initial Public Offerings (IPOs) in recent years. There have been a number of high profile second generation Internet company IPOs since 2010, including Facebook and Groupon, and a variety of less well known Internet 2.0 IPOs. The success of the second generation Internet company IPOs has been mixed, with Facebook and Groupon both disappointing IPO investors shortly after their IPOs occurred. However, many analysts are excited about the Twitter IPO because the company has waited patiently to go public and has built a solid revenue generating business that can be valued using normal market valuation methods, rather than the massive speculation that surrounded many other second generation Internet IPOs.
It is important to note that Twitter has not officially announced that it intends to go public via an IPO. Despite Twitter management dismissing the idea of an IPO any time soon, a number of analysts that follow the IPO market have noted that moves made by Twitter that indicate an IPO may be in the works, perhaps as soon as 2014. It appears that Twitter’s Board of Directors has been transitioning the company’s corporate governance structure and management in ways that indicate intentions to go public via an IPO. Stock market observers point out that the people Twitter hired for their management team in recent years are seasoned professionals who have years of experience working at public companies, such as Cynthia Gaylor who was hired to be the head of Twitter’s corporate development initiatives. Ms. Gaylor is a former investment banker and managing director who worked for publicly traded Morgan Stanley. In December 2012, Twitter Chief Executive Officer (CEO) Dick Costolo promoted Mike Grupta to the position of Chief Financial Officer (CFO). Mr. Grupta is a particularly interesting choice, since he was part of the Zynga management’s effort to take that company public in late 2011. Mr. Gupta is the kind of CFO a company wants in place during the transition from a private company to a public company.
A financial advisory firm that follows young companies that may be heading for IPOs, called Greencrest Capital, said they believe a Twitter IPO is likely in 2014 because of a number of developments that usually coincide with companies going public. These include: hiring of management that are experienced with running public companies, newly announced Twitter partnerships with well known companies, growth in Twitter users, and consistent growth in Twitter revenue. Since Twitter is currently a private company, solid revenue figures are not known; however, industry observers, such as Greencrest and EMarketer estimate Twitter will generate approximately $600 million in revenue during 2013, and will surpass $1 billion in revenue by the end of 2014. Twitter’s valuation is expected to approach a sizable $11 billion by the end of 2014.
These are impressive numbers for a private company and should generate sufficient interest in an IPO to make it a successful one for Twitter, which may prod the company to go forward with an IPO in 2014. The last thing Twitter needs at this point is to have its IPO turn into another Wall Street disappointment, as many have viewed the high-profile Facebook and Groupon IPOs. IPO watchers say that the difference between successful IPOs that do well after the IPO occurs and ones that flop are the ability for the companies to realistically project future revenues and explain their business model to investors. Since Twitter has growing revenues and a solid business plan in place, the Twitter IPO has the hallmarks of a successful IPO, as long as it does not reach unrealistic valuations, due to investor mania and hype.
While Twitter may not be forced to undergo an IPO in 2014 due to a need for cash to run its business, as revenues appear to be growing and indications are the company may even be profitable, there are a couple of reasons why the Twitter IPO date should happen in 2014.
Twitter has been working hard to avoid the United States Security and Exchange Commission (SEC) requirement that private companies with more than 500 private shareholders disclose additional financial information. Once at the SEC disclosure threshold, there are few incentives for Twitter to remain private. The company has avoided SEC disclosure by allowing employees to sell some shares to a few private investor funds, locking up the shares amongst a few long term holders and keeping them off of private stock trading sites, such as SecondMarket, where private sales could quickly lead to more than 500 private Twitter shareholders. However, Twitter will eventually need to unlock its share value for current employees and investment funds holding private Twitter shares, and this can only be done via an IPO, which could force the company’s hand as soon as 2014.
With its revenue projections and business plans firmly in place by 2014, Twitter will likely want to go public via an IPO to capitalize on the continued interest by the investors in second generation Internet companies. If the company waits too long, Wall Street could turn its attention to another business sector, which would diminish the value of the Twitter IPO. When the Twitter IPO does eventually happen, it is likely to be the hottest IPO since the Facebook IPO.
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