One number matters above all others in Twitter's impending initial public offering: the opening share price.
An IPO is not geared toward prospective shareholders desperate to grab a slice of a hot company. The primary goal is to raise as much money as possible for the company and existing stockholders. Setting the share price is a tough call for Twitter and its underwriters, the investment banks handling the IPO. Go too high and underwriters may struggle to trade the stock in high-enough volume to keep it above opening price if the market tries pushing the stock lower. Too low, and Twitter may leave tens of millions on the table.
Despite technical malfunctions and public perception, Facebook's May 2012 IPO was a reasonable success for the company. Facebook set the price at $38 and the value of the stock swung wildly on opening day as hundreds of millions of shares pinged between NASDAQ traders, before closing at $38.23. In the following months, however, $FB dropped to a low of $18, as investors lost confidence.
While Facebook won't have been pleased to see the stock dip so low, the dip to less than half of the IPO price was reflective of the company's true value in the eyes of investors at the time. Facebook and its shareholders placed a $100 billion valuation on the company before the IPO. Traders clearly didn't agree, and the stock price through much of the last year reflects that. However, Facebook wrung more money out of the IPO—it only made money when the stock was first sold—than it would have if it had priced the shares at $19 instead of $38.
Those who held on to their Facebook shares since the IPO are reaping the benefits now. In September, Facebook soared to a peak of $51.60, and it's hanging around a dollar lower.
There are plenty of lessons for Twitter to take from Facebook's initial stock sale as it gears up for one of the most anticipated IPOs in recent memory. It will be praying the New York Stock Exchange can avoid the technical hiccups NASDAQ saw on Facebook's opening day, and that it squeezes every penny it can out of hungry traders with a perfectly pitched opening price.
Photo: Marius Becker, AP