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 humans in the trading.