James Dennin, Kapitall: As the Twitter IPO approaches, a new study shows stocks do better when they're already profitable before an IPO…
In addition to a billion dollar line of credit, Twitter is also looking at one of the most favorable Initial Public Offering (IPO) arrangements in over a year. Competition to partner with the company for its imminent IPO has driven down the price of the fees bankers are hoping to collect, to just 3.25% of the total money raised. Similarly sized companies Pandora (P) and LinkedIn (LKND) were charged 7% for their IPOs last year.
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However, as many bears on the company are quick to point out, Twitter still isn't very profitable yet. The company lost money in 2012, and with the possible exception of 2009, has lost money every year since its inception in 2006.The fact that so many banks are willing to help finance the company despite roughly six years of failing to turn a profit indicates the optimism about technology companies and the buoyancy of the IPO market, even despite concern about the budget battle in Washington. Yet as a new study in The Wall Street Journal has revealed, Twitter's case is hardly unusual. Of the 28 technology companies that have gone public so far this year, 19 failed to turn a profit the preceding year, a percentage of 68%. That's the highest percentage since before the dot.com bust – the highest of any year since 2007. Now, young technology companies attract investors for many reasons. Consider:
- Tech IPOs tend to bring high-risk and high-reward.
- Some investors are even dissuaded by signs of profitability, because that would indicate a company's maturity.
- Technology companies that have already matured may be less likely to grow.
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