Twitter and Groundhog Day – what do they have in common?

Posted by on September 13th, 2013

I feel like it’s Groundhog Day.  Don’t you?  When it comes to investors and social media stocks, it really is true that those who don’t learn from history are doomed to repeat it.

Over a year ago Facebook filed an S-1 for an IPO with a more than $100 billion valuation.  At that time, I questioned the veracity of the valuation the company was putting on itself.  The company filed an S-1 with the Securities and Exchange Commission.  The problem I had was that the information communicated in its filing failed to justify the valuation it was asking the markets to pay for its stock.  Post-IPO, as we all know, the markets agreed that Facebook maybe “liked” itself a little too much and the stock fell significantly. That hurt a lot of institutional investors  who had invested directly in the IPO as well as individuals who invested indirectly through mutual funds, 401ks, 529 plans, etc. (Clearly their communications of recent and performance have helped ameliorate this.)

As we learned yesterday, Twitter announced via a tweet that it also was going to seek the assistance of the capital markets by way of a public offering.  The main difference between Facebook and Twitter is that Twitter filed confidentially under the guise of the JOBS (Jumpstart Our Business Startups) Act, passed by Congress more than a year ago. This means Twitter is now able to gauge the receptivity of “institutional” investors via their lead underwriter, Goldman Sachs, without publicly communicating how their company should be valued.

So what’s my issue this time?  I have a few.

First, Twitter’s tweet yesterday makes its “confidential” filing no longer “confidential.” We all know about it now.  In my opinion this is an affront to the spirit of the JOBS Act which was to allow relatively “small” companies to consider an IPO without having to “publicly” commit to it.  Well that cat is out of the bag.  Does anyone really think they won’t eventually go forward with it, and is Twitter a “small” company as Congress intended?

Second, I don’t believe the JOBS Act was intended to allow companies to shield themselves from the obligation to be transparent in their communications and to have to justify their valuation.  Yes, it is true that Twitter will eventually have to file, but again, does anyone think that an IPO isn’t a fait accompli? They should have to file now so we can all start to think about the company’s valuation and whether or not, if given the opportunity, to invest.

Third, as with Facebook, I have an issue with the fact that institutional investors are going to have an advantage over everyone else by way of information and communications.  I may be wrong but I am pretty certain that in the coming months Goldman will not be hosting public, non-institutional investor exclusive events where Twitter management will make a presentation about its business and answers questions to explain why they believe the capital markets should invest hundreds of million if not billions of dollars.  I don’t believe the JOBS Act was intended to supersede Regulation Fair Disclosure when it comes to leveling the playing field between the individual and institutional investor.

Facebook undoubtedly will be forever remembered in the history books as one of the great IPO calamities.  Unless it does something different, it seems that Twitter might be included as well.