Twitter tantalises, but beware the IPO

Oct 27 2013, 02:04 IST
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The company announced it would set its stock price between $17 and $20 a share. The company announced it would set its stock price between $17 and $20 a share.
SummaryPerhaps you’ve heard that Twitter is planning an initial public offering.

Perhaps you’ve heard that Twitter is planning an initial public offering. On Thursday, the company announced it would set its stock price between $17 and $20 a share, an amount that would earn it roughly $1.3 billion, and move the sale up to November 6.

While it’s a much-anticipated event, it’s a little too soon to tell whether it will generate the same frenzy as the Facebook IPO last year. Or whether, given Facebook’s disastrous debut—technical problems, and an initial drop in the stock’s value of more than 50%—Twitter’s owners want to manage expectations.

Twitter is far from alone in going public this year; there have been over 160 other IPOs so far. But Twitter’s prominence offers a good moment to stop and ask: Should any individual investors buy into an initial public offering, and if so, how should they think about doing it?

According to research from Fidelity Investments, the number of IPOs so far this year is up 40% from the same point last year, and the dollar values of those offerings has increased 10%. Of those offerings, the top three sectors were energy, financial services and healthcare companies. Technology was in fifth place, with just 12% of the offerings.

Twitter is the type of IPO that creates attention that others like USA Compression Partners, the first company to go public in 2013, or Evertec, the largest technology IPO of the year to date, cannot. (USA Compression makes equipment related to shale drilling; Evertec processes payments from Latin America.) And that might entice people to try to buy the stock without thinking it through.

“The market for IPOs is as strong as it has been in some time,” said Brian Conroy, president of Fidelity Capital Markets. “The more brand recognition a company has in the marketplace, the higher probability that it will attract a greater share of investors, all things considered.”

But excitement for a brand and financial success are not always related. Recall Pets.com and its ubiquitous sock-puppet spokesman: the company liquidated the same year it went public, though the sock puppet had a second career.

With IPOs, there are more subtle risks than total failure, particularly for an investor who is jittery or thinks IPOs go up in value as they did in the late 1990s. Advisers I heard from said, simply, don’t do it—at least not as a stock-picking opportunity.

“Everyone remembers the big winners,” said Joe Jennings, investment director for the Maryland

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