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Twitter plans to make its IPO filing public this week

September 29, 2013
September 29, 2013

Twitter’s IPO filing is ready, and the company intends to make it public this week, according to someone familiar with the plan. The goal is for Twitter to begin trading, likely on the New York Stock Exchange, before Thanksgiving.

The source stressed that Twitter’s filing could still be delayed by a variety of factors, from changes to the prospectus to market conditions to a potential shutdown of the US government.

To pull off its ambitious schedule, Twitter will have to condense the timing of some traditional pre-IPO activities. Things are likely to move quickly once the filing is released, so here’s a guide to follow along. We are also tracking the latest news and analysis at secretipo.com/twitter.

What has happened so far

It may seem as though Twitter got things started on Sept. 12, when the company tweeted it had “confidentially submitted an S-1 to the SEC for a planned IPO.” But Twitter had actually made that submission about two months earlier, in July. The September announcement wasn’t required by law, but a source says Twitter intended to get out ahead of any press leaks and avoid a frenzy later on by simply making a public filing with no warning.

Form S-1 is filled out by almost all companies going public in the United States. It’s a lengthy prospectus that details prior financial results, the structure of the business, risks posed by investing in the company, and more. Typically, the S-1 is filed publicly, and then government regulators provide feedback in public, as well.

But under a new law called the JOBS Act, Twitter was permitted to submit a draft of its S-1 to the US Securities and Exchange Commission (SEC) in private because its annual revenue is under $1 billion. The SEC started offering Twitter confidential feedback on the document in August, according to a source.

The option to file confidentially was intended to help startups deciding whether to raise more venture capital, sell to another company, or go public. By exploring those choices in private, the startup can avoid disclosing details about its business if it chooses not to go public. Twitter isn’t considering any other option but an IPO, but it took advantage of the clause in the hopes of dampening the kind of hype that turned Facebook’s IPO into a debacle.

But all of that secrecy will end soon. Twitter has to eventually make its S-1 public, which is what it intends to do this week. And it also must disclose any previous drafts of the document that were submitted to the SEC. So there will be plenty of interesting reading material to pour over—tens of thousands of words and figures.

What happens next

The official filing of Twitter’s S-1 could come at any time.

Since it has been revising the document for a while and intends to march quickly toward its IPO, Twitter’s first public filing is likely to be more complete than usual. It may reveal, for instance, which stock exchange it will trade on. (The New York Stock Exchange is believed to have successfully wooed Twitter over the tech-heavy Nasdaq.)

The S-1 will also reveal how much Twitter intends to raise in the IPO and how much each share will cost. Typically those figures are placeholders to be revised later after gauging market reaction, but in this case, they are likely to be closer to reality. That’s in part because Twitter has already been talking to potential large investors and getting a sense of their appetite, something that’s typically prohibited but which the JOBS Act allows.

Twitter’s IPO price is currently thought to be in the range of $28 to $30 a share, which would value the company between $15 billion and $16 billion. But those figures could still change quite a bit before the IPO.

Twitter will also make official which banks are facilitating the offering. Goldman Sachs is known to have secured the “lead left” position, which means it will collect more fees than the other lead banks, which are JP Morgan Chase and Morgan Stanley. That part is really a battle for bragging rights that few outside of Wall Street care about.

Most of the attention will be directed at Twitter’s balance sheets and related data. Here are three sections of the S-1 worth turning to first:

Selected Consolidated Financial Data

This is where Twitter has to reveal how much cash has been coming in (revenue), what it’s been spending money on (costs and expenses) and whether it’s been turning a profit (net income).

Ordinarily, Twitter would have to disclose that information for the past five fiscal years, going to back to a time when it was struggling and not bringing in much money. Twitter wasn’t incorporated until April 2007. But under the JOBS Act, the company could choose to reveal only two years of top-line financial data (or three or four, if it prefers). That would risk raising eyebrows among investors, but it’s an option.

Other data Twitter will disclose is hard to predict because it can vary from company to company, but it’s fair to assume we’ll get a breakdown of types of revenue. Most people focus on Twitter’s advertising business, but it also generates revenue from licensing access to the “firehose” of all tweets to marketing and analytics firms. The S-1 should reveal, for the first time, how much of Twitter’s business is in advertising and how much in data.

Because Twitter is an internet service, it will likely discuss how many users it has in terms of “monthly active users” (how many people use it at least once a month) and “daily active users.” It should also indicate its “average revenue per user,” which for Facebook is a dollar and change.

Twitter will also probably break down a lot of these data by region, since its worldwide growth is imbalanced and, like Facebook, it makes much more money off its users in the US.

Risk Factors

This is perhaps the juiciest section of any IPO filing, though also the hardest to predict. Much of the “risk factors” section is boilerplate that could apply to any investment, but some of it—probably the risks toward the beginning of the section—will be very specific to Twitter. In essence, the company is supposed to disclose anything that could go wrong and imperil its value, so it’s a good way of seeing what Twitter thinks is essential to its business.

If you think back to Facebook’s IPO, “risk factors” is where the company disclosed that its users’ rapid shift to mobile devices was hurting advertising revenue, which spooked investors. That’s not likely to be Twitter’s problem, but it may have to raise similar kinds of red flags about its potential to grow revenue.

There are often juicy data points hiding in this section, as well. Facebook, for instance, revealed that gaming company Zynga accounted for 12% of its revenue. That’s not something that would show up in a line item of a financial sheet, but it was an important disclosure.

Principal and Selling Shareholders

This is where we find out who owns Twitter—and stands to make a killing off the IPO. Some of that information is already known: co-founder Ev Williams was recently reported to be Twitter’s largest shareholder, with a 15% stake. But other details aren’t known, and the S-1 should clear up a lot.

Twitter is required to disclose the stakes of anyone who owns more than 5% of the company as well as any member of its board and certain top executives. For a startup that has raised more than a billion dollars in private funding and is no longer run by its founders, the list of principal shareholders ought to be revealing.​

Other sections of the S-1 that are typically interesting include “executive compensation,” but that may not appear in Twitter’s filing—or could be limited—because, yet again, the JOBS Act makes it optional.

It will also be interesting to see whether CEO Dick Costolo includes a letter to investors, which isn’t necessary but has become typical of IPOs by technology companies that want to convey certain values. Google’s S-1 is where founders Larry Page and Sergei Brin introduced the motto, “Don’t be evil.” Facebook CEO Mark Zuckerberg used to his letter to make clear he was not interested in “simply maximizing profits.”

What happens after that

Once Twitter files its S-1, it has to wait at least three weeks before it can begin a “road show,” which is when a company going public typically markets itself to potential large investors. As we’ve reported previously, Twitter’s road show has already begun, in a sense, because the JOBS Act loosens regulations around talking to investors. The company intends to keep its official road show short and sweet.

The upshot is that investors, journalists, and onlookers will have 21 days—and not much longer—to assess whatever Twitter reveals in its S-1.

It’s also likely that Twitter will revise its S-1 after the first filing. The amendments could fill in holes from the first version, adjust the pricing and volume of shares, make new disclosures, or add more mundane information as the company gets closer to its first day of trading.

The initial public offering usually happens the day before shares starting trading in public and is generally limited to large and well-connected investors. Those shares are sold at the “IPO price.”

When Twitter’s shares start trading the next day, undoubtedly under the ticker symbol TWTR, they could open higher or lower than the IPO price. A large “pop” above the IPO price is generally seen as a success, though too big a pop can be a sign that the bankers misjudged the company’s value. Conversely, if the company falls below its IPO price on the first day of trading, its bankers typically step in to prop up the stock.

All of those dubious traditions make IPOs seem more like a beauty contest than an investment. Twitter’s intention is to avoid a lot of that hype, but the thing about going public is that, by design, you give up at least some control over what happens to the company. If the market wants to treat Twitter’s stock irrationally, driving up its value to unjustifiable heights, it can do that. And it can turn on the company just as fast.

What actually matters is how Twitter trades in the long run and whether the pressure of public shareholders changes the soul of the company for better or worse.

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