NEW YORK (MainStreet) After years of speculation surrounding the event, Twitter is finally set for its initial public offering. TWTR is expected to be priced Wednesday night and will begin trading on Thursday. Despite the hype and demand, Twitter has a giant shadow over its IPO, and that shadow is Facebook.
The Facebook IPO was a disaster, to put it lightly, and that disaster has led many to be cautious ahead of the much-hyped Twitter IPO. However, I believe that because Facebook was such a disaster, Twitter will have a much different fate.
IPOs are priced based on investor demand. If demand is high, banks can raise the price of the stock, thus increasing the fee they receive and increasing the money raised for the company going public. However, sometimes banks will intentionally price IPOs lower than demand, so when the stock begins to trade, it will see large gains. What this does is excite investors and increase demand for the next IPO in the hopes that it will "pop" and they can flip their shares for a nice profit.
The amount a stock "pops" on its IPO is largely decided by the banks that are underwriting this deal. Goldman Sachs is the lead underwriter for Twitter; Morgan Stanley was the lead underwriter for Facebook. What better way for Goldman Sachs to attract future clients over Morgan Stanley than to show that it can successfully orchestrate a large, much-hyped IPO? The opportunity for Goldman Sachs is too great. Even more important than allowing Goldman Sachs to uphold its reputation, a successful Twitter debut is vital for the success of future IPOs.