Twitter IPO as Economical as Its Tweets With 27% Discount

(Bloomberg) — Twitter Inc.s $10.9 billion initial public offering valuation is as economical as its 140-character tweets.

The San Francisco-based company is seeking a valuation of 9.5 times 2014 sales in its IPO next month, according to data released in a filing with the Securities and Exchange Commission yesterday and analyst projections compiled by Bloomberg. Thats 27 percent cheaper than the 12.9 times 2014 sales that Facebook Inc. currently trades at, and 29 percent lower than LinkedIn Corp.s multiple of 13.4 times sales, the data show.

The discount Twitter is offering underscores how the six- year-old short-messaging site is working to avoid the fate of Facebook, Groupon Inc. and Zynga Inc., which all lost more than half of their value within six months of their initial offerings. Twitter Chief Executive Officer Dick Costolo has taken a different tack from the start, first by filing confidentially to go public to avoid the hype that drove up Facebooks pre-IPO valuation, and now by pricing the company more modestly than some of its Internet peers. The moves have left Twitter positioned to capitalize on a revival in investor appetite for social-media stocks.

Its fair to say theyre learning from Facebooks mistakes, said Michael Scanlon, managing director at Manulife Asset Management in Boston, who helps manage $3 billion. Its hard to imagine this deal isnt oversubscribed and then theyll have to gauge what they think the opportunity is to increase the price.

$10.9 Billion

Twitter is planning to sell 70 million shares — or a 13 percent stake — at $17 to $20 each to raise as much as $1.4 billion, according to a filing yesterday. The $10.9 billion valuation at the top end of the range is based on the 544.7 million common shares outstanding after the IPO.

On a fully diluted basis, including restricted stock and options, Twitter will have about 695.2 million shares outstanding. By that measure, at the top end of the range Twitter would be valued at $13.9 billion.

The sale would be the largest IPO for an Internet company since Facebook debuted on the stock market in May 2012 and raised $16 billion. At the time, Facebook was valued at $81.3 billion based on the number of its common shares, or $104 billion based on a fully diluted share count. The Menlo Park, California-based company rode a wave of hype and bumped up its offering price range to $34 to $38 after initially seeking $28 to $35.

No Facebook

Facebook in its IPO was priced at 107 times trailing 12- month earnings on a fully diluted basis, making it more expensive than 99 percent of all companies in the Standard & Poors 500 Index at the time. The company quickly saw its stock sink below its $38 debut price after its IPO, before finally rallying to close above that level this August.

For Silicon Valley, a successful Twitter IPO will go a long way toward erasing the aftertaste from Facebooks IPO, which along with the poor stock market performances of Zynga and Groupon shattered confidence in consumer Internet companies.

Following those offerings, venture capitalists and others shifted investing dollars to technology businesses that sold their products to other businesses, said Nihal Mehta, founder of LocalResponse Inc. and venture capitalist at Eniac Ventures. Now with Twitters debut and Facebook trading above its offering price, confidence in consumer technology has revived.

Twitter will help escalate all the other advertising- based consumer companies, and create potential for more to be born, Mehta said. Were seeing more consumer deals than we ever have before.