The Banknote

The San Francisco-based company is seeking a valuation of 9.5 times 2014 sales in its IPO next month, according to data released in a filing with the Securities and Exchange Commission yesterday and analyst projections compiled by Bloomberg. That’s 27 percent cheaper than the 12.9 times 2014 sales that Facebook Inc. currently trades at, and 29 percent lower than LinkedIn Corp.’s multiple of 13.4 times sales, the data show.
The discount Twitter is offering underscores how the six-year-old short-messaging site is working to avoid the fate of Facebook, Groupon Inc. and Zynga Inc., which all lost more than half of their value within six months of their initial offerings. Twitter Chief Executive Officer Dick Costolo has taken a different tack from the start, first by filing confidentially to go public to avoid the hype that drove up Facebook’s pre-IPO valuation, and now by pricing the company more modestly than some of its Internet peers. The moves have left Twitter positioned to capitalize on a revival in investor appetite for social-media stocks.
“It’s fair to say they’re learning from Facebook’s mistakes,” said Michael Scanlon, managing director at Manulife Asset Management in Boston, who helps manage $3 billion. “It’s hard to imagine this deal isn’t oversubscribed and then they’ll have to gauge what they think the opportunity is to increase the price.”
$10.9 Billion
Twitter is planning to sell 70 million shares -- or a 13 percent stake -- at $17 to $20 each to raise as much as $1.4 billion, according to a filing yesterday. The $10.9 billion valuation at the top end of the range is based on the 544.7 million common shares outstanding after the IPO.
On a fully diluted basis, including restricted stock and options, Twitter will have about 695.2 million shares outstanding. By that measure, at the top end of the range Twitter would be valued at $13.9 billion.
The sale would be the largest IPO for an Internet company since Facebook debuted on the stock market in May 2012 and raised $16 billion. At the time, Facebook was valued at $81.3 billion based on the number of its common shares, or $104 billion based on a fully diluted share count. The Menlo Park, California-based company rode a wave of hype and bumped up its offering price range to $34 to $38 after initially seeking $28 to $35.
No Facebook
Facebook in its IPO was priced at 107 times trailing 12-month earnings on a fully diluted basis, making it more expensive than 99 percent of all companies in the Standard & Poor’s 500 Index at the time. The company quickly saw its stock sink below its $38 debut price after its IPO, before finally rallying to close above that level this August.
For Silicon Valley, a successful Twitter IPO will go a long way toward erasing the aftertaste from Facebook’s IPO, which along with the poor stock market performances of Zynga and Groupon shattered confidence in consumer Internet companies.
Following those offerings, venture capitalists and others shifted investing dollars to technology businesses that sold their products to other businesses, said Nihal Mehta, founder of LocalResponse Inc. and venture capitalist at Eniac Ventures. Now with Twitter’s debut and Facebook trading above its offering price, confidence in consumer technology has revived.
“Twitter will help escalate all the other advertising-based consumer companies, and create potential for more to be born,” Mehta said. “We’re seeing more consumer deals than we ever have before.”
Risk Factors
While Twitter has more than doubled revenue annually, to $534.4 million in the 12 months through Sept. 30, user growth is slowing, filings show. The service had 231.7 million monthly users in the three months through September, up 39 percent from a year earlier. That compares with 65 percent growth in the previous year.
Average revenue per user is less than half Facebook’s, filings show, with Twitter’s RPU at 73 cents, based on sales of $168.6 million in the third quarter, compared with Facebook’s $1.60 average monthly revenue per user.
Losses have also widened. For the third quarter, Twitter said its net loss expanded to $64.6 million from $21.6 million a year earlier.
Diluted Stakes
In the IPO, Twitter is selling 70 million shares, with another 10.5 million available to underwriters should they choose to exercise their option to buy shares. The offering will dilute the stakes of some holders, with co-founder Evan Williams’s stake dropping to 10.4 percent from 12 percent after the offering, the filing shows. He’s the single-biggest individual stockholder.
Employees who aren’t executives will be eligible to sell almost 10 million shares as early as Feb. 15. All stock held by executives and directors is subject to a standard 180-day lockup period.
Twitter will start meeting investors on its road show on Oct. 28, according to a schedule obtained by Bloomberg. The company will make stops in cities including New York, Boston, Chicago, San Francisco, Los Angeles and Denver before ending up back in New York on Nov. 6, the same day the final pricing of the shares is scheduled. Twitter would then start trading on the New York Stock Exchange the next day.
Costolo’s Message
Costolo and Chief Financial Officer Mike Gupta will lead the meetings, according to a person with knowledge of the matter, who asked not to be identified because the plans are private. Costolo and Gupta will be meeting today with banks including Goldman Sachs Group Inc. to practice their road-show presentation, according to another person with knowledge of the plans.
On the road show, Twitter, which has historically booked net losses, will point toward an adjusted measure of earnings before interest, taxes, depreciation and amortization to signal its profitability, one of the people said. The adjusted Ebitda excludes the effects of stock-based compensation and investments in servers, leases and networking equipment to support the company’s expansion, the company’s filing showed.
Adjusted Ebitda was $9.3 million in the quarter ended Sept. 30, compared with $2.9 million a year earlier.
Twitter also will describe the company as a conversational, public, real-time and distributed platform, as was outlined in its filings.
Spending Proceeds
With the money from the offering, Twitter may seek to expand globally and prove it can draw advertisers to the network. Advertisers can sponsor one of the service’s posts, paying to have it show up on users’ feeds even if they don’t follow the company.
Costolo is betting that the service’s popularity on mobile phones will help lure advertisers. About three-fourths of Twitter’s most active users accessed the service from mobile devices in the three months through September, compared with 69 percent in the year-earlier period, according to the filing. More than 70 percent of advertising revenue comes from those devices, a higher proportion than Facebook’s.
With an IPO, Twitter is set to cap its journey as a rudimentary site for short posts to a global megaphone for celebrities, politicians, businesses and more. The service came out of a failing startup from co-founder Williams called Odeo in 2006. Other co-founders include Biz Stone and Jack Dorsey, who was CEO in Twitter’s early days and now runs Square Inc.
Icahn, Bieber
The company’s site has become a destination for users to discuss everything from the finale of AMC series “Breaking Bad” to the unfolding of terrorist attacks and revolutions. Activist investor Carl Icahn used the platform to announce his discussions with Apple Inc. CEO Tim Cook, moving the stock with some updates. Pop star Justin Bieber, who has 45 million followers, has said things like “You will know my words, my heart #journals.”
Today there are more than 500 million posts, or tweets, each day, compared with 2 million per day in January 2009, the company has said.
Twitter will trade under the symbol TWTR on the New York Stock Exchange. The choice of the NYSE may let Twitter avoid the technical gaffes that plagued Facebook’s IPO last year on the Nasdaq Stock Market. It also follows years of the exchange trying to attract young technology companies away from its rival. While it missed out on Facebook, the NYSE won LinkedIn and Pandora Media Inc.’s IPOs in 2011.
Goldman Sachs is the lead underwriter of the IPO, joined by Morgan Stanley, JPMorgan Chase & Co., Bank of America Corp., Deutsche Bank AG, Allen & Co. and Code Advisors.
To contact the reporters on this story: Sarah Frier in New York at sfrier1@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net
To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net; Jeffrey McCracken at jmccracken3@bloomberg.net