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Twitter IPO could inspire others to fly the nest

November 10, 2013 2:18 pm

Top Silicon Valley firms to accelerate their plans

Many privately owned tech firms, including Box, Square and Airbnb, are likely to accelerate their IPO plans, following Twitter’s IPO.

File-sharing firm Box selected Morgan Stanley, Credit Suisse and JP Morgan to lead its IPO. The company has been valued at more than $1.2 billion by private venture capital investors, but it remains unclear whether it’s profitable. Twitter’s lack of profits proved to be no obstacle to the micro-blogging site, having raised as much as $2.1 billion for its IPO. Its current share price of approximately $41 gives it a market value that is worth $22 billion.

“Despite its marginal fall at the end of the day, Twitter is as large as some companies with five times its workforce,” says Vidya S Nath, director of digital media at Frost & Sullivan. “It will be curious to see if it can use the money to expand its objectives and businesses. Twitter will have to diversify and reduce dependence on advertising for revenue. Moreover, it faces the challenge of ‘tired’ user accounts. With its current valuation, 20 to 30 per cent of projected growth alone won’t suffice to keep it interesting to investors.”

London Business School’s Freek Vermeulen, associate professor of strategy and entrepreneurship, believes that some may grumble that while Twitter left money on the table by pricing its IPO too low, most consider it to be a success “and there are going to be a few surprises for Twitter’s top management team”.

“Although they have probably been warned about the pressures regarding short-term profitability, many CEOs that have already completed IPOs will acknowledge, after a year or two, that they underestimated exactly how much time it actually takes to be a public company and manage the Wall Street. Quite literally, it often takes up 30 to 50 percent of a CEO’s daily calendar,” he says.

Yet, the biggest surprise for many is the power that analysts yield, adds Vermeulen, since research shows that equity analysts exert considerable influence over the strategy of public companies.

“Public companies often have difficulties following unique and innovative strategies – even when its top management thinks that would be the best way to go – because of analyst pressure. Collectively, equity analysts have real power over a company. Academic studies show that they like simple and easy-to-understand strategies that do not deviate from the norm. Twitter would not be the first company to cave in eventually and revert to conformity, which is not necessarily the best course of action for its long-term performance,” he concludes.