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Maybe Facebook Priced its IPO Better Than Twitter

NEW YORK (TheStreet) -- If Facebook's (FB) May 2012 initial public offering was a moment of mass pandemonium not seen since a stock market "flash crash" a few years ago, Twitter's (TWTR) share listing was a non-event, other than the firm's near 73% rise from its $26 a share offering price.

By the end of Twitter's first day of trading two co-founders of the company had become paper billionaires in the firm's shares. Overall, Twitter posted the largest one-day jump for an IPO over $1 billion since 2007, according to Bloomberg.

Twitter's IPO was a stark contrast to Facebook's listing.

Twitter sold just $1.82 billion in stock, compared to Facebook's $16 billion share offering, which shattered records for an Internet firm. But in Twitter's IPO there were none of the technical glitches that made it unclear who owned Facebook's stock for hours on end. 

Now, of course, after Twitter's Thursday share offering comes the Friday morning quarterbacking.

Did Twitter leave money on the table? Did retail investors get a shot at investing in Twitter? Is the company wildly overvalued?

Those questions contrast to Facebook's listing. Did Facebook over-price its offering? Did retail investors get flooded or left holding the bag of a broken stock?

Friday morning quarterbacks might be inclined to point a finger at Twitter.

The company raised $1.76 billion in capital through its share listing. Investors who were allocated Twitter shares after its IPO pricing late on Wednesday were in the money by roughly $1.3 billion by the time the company's stock began trading on the New York Stock Exchange on Thursday.

Reports from CNBC's David Faber indicate that Twitter's offering was oversubscribed by a multiple of 30. In contrast, interviews show that Facebook's underwriters were putting out calls to small institutional accounts and left large allocations for retail investors in order to fill the mammoth stock offering. Ordinary investors basically had the ability to buy as many Facebook shares as they wanted.

After falling sharply in the wake of its IPO, Facebook shares have since recovered and are slightly outperforming the S&P 500 Index in their time on public stock markets. So despite the rough ride, one could say Facebook raised the maximum amount of capital it could. The company reported about $10 billion in its bank account as of Sept. 30. Retail investors got their shares, and those who held on for the long term have made money.

No harm, no foul on Facebook's botched IPO?

Most market participants continue see the IPO as a confluence of over-optimism by Facebook's management, an aggressive pricing by underwriter Morgan Stanley (MS) and serious technical flaws by Nasdaq (NDAQ), the exchange where Facebook shares are listed.

Now, apparently, the finger pointing has turned to Twitter.

After all, the 73% day-one gains in Twitter shares were only made by investors who got a piece of the company's IPO allocation and not ordinary investors buying into the open. Twitter shares opened at $45.10, but closed down 20 cents on their first day of trading.

Some say that the Twitter's IPO ripped off investors. That strikes me as a bit shrill.

Twitter, in spite of clear signs of strong demand during its IPO road show, never increased its offering size. Meanwhile, the company's offering price only rose 30% from the high end of its initial price range.

More importantly, Twitter only sold roughly 12% of its total shares to public investors and it now has strong credibility if it were to want to raise additional capital. Market watchers should remember Twitter receives money in its IPO from underwriters who build an order-book to sell to investors, not from those who trade the company's shares in public stock markets.

Dan Greenshields, president of Capital One ShareBuilder, said Twitter stock trades accounted for about 50% of the online brokerage's volume on Thursday.

Greenshields added in a telephone interview after the market close that Twitter's IPO also resulted in the Capital One ShareBuilder's highest daily trading volume of the year.

Reports indicate retail investors were given about 10% of Twitter's 70 million share offering, and the Financial Times reported that retail orders represented between a quarter and a third of Twitter's trading volume at the market open.

Twitter's $26 a share IPO price -- the price that it sold shares to investors -- was generally seen as reasonable given the company's revenue growth prospects but uncertain profitability. Investors paying $45.10 a share for a piece of Twitter, however, may be speculating.

Brian Wieser, an analyst at Pivotal Global Research, downgraded Twitter from "buy" to "sell" given the company's high opening price. Hudson Square Research analyst Daniel Ernst similarly said in a Friday initiation of Twitter shares that the company's stock was overvalued.

Generally speaking, Twitter is now valued at price-to-revenue multiples analysts had targeted for the end of 2014. So hopefully those currently buying Twitter shares are prepared to invest for the long-haul.

I'm inclined to believe Twitter did the right thing in its IPO.

The company priced its offering fairly and at a time when investors are putting their money in risky assets at ever higher prices. Twitter also has a lot left to prove in terms of its user growth, profitability and return on investment to advertisers.

Had the company dramatically increased its offering size or price to allow greater investor access to its IPO, it could have undermined the company's credibility were it to stumble in its execution. As it currently stands, retail investors can now buy or sell Twitter shares at whatever price they deem reasonable.

My sense, however, is that Twitter is currently trading at prices that might temper short-term speculative demand for the company's shares.

"I think that the Twitter IPO will be one piece of evidence that the race to the bottom has resumed," Howard Marks, head of Oaktree Capital Management, said in a Thursday interview with Bloomberg TV.

-- Written by Antoine Gara in New York

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