Analysis: Why Twitter flew and Facebook flopped

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Anthony Noto, the Goldman Sachs banker who led Twitter's successful IPO.

Anthony Noto, the Goldman Sachs banker who led Twitter’s successful IPO.

Anthony Noto, the Goldman Sachs banker who led Twitter’s initial public offering, tweeted “Phew!” on Thursday as shares of the micro-blogging service opened at $45.10, up more than 70%, and added to those gains through the afternoon.

Noto was relieved because Wall Street had been waiting and wondering for months whether Twitter’s IPO would be a flop like rival Facebook’s 2012 stock market debut.

Instead, the Twitter offering was a huge success, raising about $2 billion for the company, while leaving IPO investors with big first-day gains.

“It’s been a blockbuster and has shocked even the most bullish predictions,” said Scott Sweet, head of IPO Boutique, who has researched stock offerings for decades.

Twitter shares ended their first day at $44.90, up 73% from the $26 IPO price. In contrast, Facebook shares rose less than 1% on their first day in May 2012 and then slumped in the following months.

Sweet and other analysts and investors cited many reasons for these radically different outcomes, including technical stock exchange issues, the different offering sizes (Facebook’s dwarfed Twitter’s), which investors got stock and how well the companies handled the shift to mobile advertising at the time they went public.

But ultimately it came down to respect for institutional investors and the way things are traditionally done on Wall Street.

“They paid appropriate respect to the process of having an IPO,” said Brian Wieser, an analyst at Pivotal Research Group.

Twitter executives, led by CEO Dick Costolo, went on an extended road show, making themselves available to more investors, listening to questions and trying to answer them seriously.

When it came to pricing the IPO, Twitter chose $26 when there was enough demand to put a higher price on the stock and raise more money from the offering.

Twitter even set up an investor relations department run by Nils Erdmann, way ahead of the IPO, suggesting the company will be financially responsible and listen to investor concerns going forward.

“None of this was true with Facebook,” Wieser said.

During the roadshow, Twitter executives stressed that the company is developing technology and advertising products that benefit from the switch from desktop computers to smartphones and other mobile devices, according to Dan Miller-Smith, CEO of, a research firm focused on IPOs.

In contrast, Facebook had not cracked the mobile ad question when it went public. Just before the IPO, the company cut its estimates because of this, but only large institutional investors were told about the change, leaving small investors in the dark.

“That was catastrophic and unethical,” Sweet said.

Facebook spokesman Slater Tow declined to comment on Facebook’s IPO and how it compared to Twitter’s.

Twitter executives also said that the company should be able to generate adjusted EBITDA profit margins of 35% to 40% over the long term. Facebook avoided such projections and when CEO and co-founder Mark Zuckerberg was asked questions by investors his answers were not as specific.

“Management at Twitter — Dick Costolo in particular — knew how to play ball with Wall Street and they took the roadshow very seriously,” said Miller-Smith. “In contrast, Mark Zuckerberg showed his immaturity at the roadshow events wearing his trademark hoodie to meetings with large institutional players, which was to many a sign of disrespect.”

Investors and analysts mostly credited Twitter management for following Wall Street traditions like this to get investors comfortable with the company. But the influence of Goldman’s Noto may also have helped.

Noto won the Twitter IPO deal against competition from Michael Grimes of Morgan Stanley, who ran the Facebook offering.

Before becoming a Goldman investment banker, Noto was an Internet, media and communications analyst at the firm from 1999, where he was regularly ranked at the top of his game.

That experience gave him an understanding of what Wall Street investors want to hear when they are deciding whether to invest lots of money in a technology company that has yet to make a real profit.

“What makes him unique is that he’s already been out there selling, so he can tell you ‘here’s how we will help analysts understand your company,’” said Scot Wingo, CEO of e-commerce company ChannelAdvisor, which tapped Noto to oversee its IPO earlier this year.

“He has a lot of credibility when he explains how the IPO process works and how the people who will evaluate your business think,” added Wingo.

At the San Francisco roadshow lunch on Monday at the Ritz-Carlton hotel Noto talked for several minutes about how Twitter is a fantastic company, before introducing Costolo and other Twitter executives.

This was an unusual move because most bankers typically thank investors for attending and then quickly make way for company management. Indeed, Morgan Stanley’s Grimes kept his introduction short when Facebook’s roadshow came to the Bay Area.

On Thursday, as Twitter shares were getting ready to start trading, Noto could not resist more sales pitches.

The Goldman banker tweeted “#indispensable,” possibly referring to how useful he thinks Twitter’s service is. And when Costolo was being interviewed on CNBC, Noto tweeted “crushing it on CNBC!”

Courtesy of USA Today

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