Tag Archives: Markets coverage
by Chris Roush
The Daily Show’s Samantha Bee spoke with Gretchen Morgenson of the New York Times business desk about why most of the financial media — except for Bloomberg News — failed to cover a shady credit default swap deal by the Blackstone Group.
She then asked the business desk of BuzzFeed how they would cover the story.
by Chris Roush
Dow Jones seeks a reporter to cover private equity deals, fundraising and other news about the industry, writing both for specialist publications and the Wall Street Journal. We’re looking for a talented and versatile journalist who is good at landing scoops as well as writing broader analysis stories and quick blog posts and tweets.
The job entails writing both for the professional audience that pays a premium for our subscription news products but also the broader audience of the WSJ.
Please attach a resume, cover letter and three to five published clips to your online application.
To apply, go here.
by Liz Hester
Subprime loans are back, according to two pre-Thanksgiving stories. But it isn’t for those looking to buy a home, now banks are issuing them to business owners and those looking for cars.
The New York Times had a story about small businesses using subprime loans. Banks are issuing them as investor demand for yield rises and they’re able to package and sell them:
A small, little-known company from Missouri borrows hundreds of millions of dollars from two of the biggest names in Wall Street finance. The loans are rated subprime. What’s more, they carry few of the standard protections seen in ordinary debt, making them particularly risky bets.
But investors clamor to buy pieces of the loans, one of which pays annual interest of at least 8.75 percent. Demand is so strong, some buyers have to settle for less than they wanted.
A scene from the years leading up to the financial crisis in 2008? No, last month.
The company involved was Learfield Communications, of Jefferson City, Mo., which owns multimedia rights to more than four dozen college sports programs and which made just under $40 million last year in a common measure of earnings. But its $330 million loan package from Deutsche Bank and GE Capital on Oct. 9 highlights how five years after a credit bubble burst, a new boom is taking shape.
Companies like Learfield are the belles of the ball this year. Wall Street and private equity firms, hedge funds and other opaque financing pools have grown frustrated by low returns on other forms of debt and turned instead to riskier but more lucrative bets on ever-smaller companies. The Learfield case is notable for the leverage involved — the company was able to borrow more than eight times its earnings — and that has raised eyebrows in some credit circles.
The story went on to chronicle the history and some of the downfalls of subprime loans:
Leveraged loans became popular before the 2008 collapse but nearly disappeared afterward, regarded as a symbol of unbridled lending. But they started to return in 2010 and are now back in force, with volumes of $548.4 billion this year through Nov. 14, already exceeding the precrisis level of $535.2 billion in 2007.
The type of leveraged loans that Learfield took out are known as covenant-lite, financial lingo for loans that lack the tripwires that could alert investors to any potential financial troubles at the company that could affect repayment. More than half of all leveraged loans issued this year have been the so-called cov-lite types, double the level seen in 2007 on the eve of the credit crash.
Bloomberg Businessweek wrote a piece about the rise of subprime car loans, another area banks are turning to in order to increase profit:
As the fifth anniversary of the Federal Reserve’s policy of keeping interest rates near zero approaches, the market for subprime borrowing is again becoming frothy, this time in the car business instead of housing. U.S. auto sales, on pace for the best year since 2007, are increasingly being fueled by borrowers with spotty credit. They accounted for more than 27 percent of loans for new vehicles in the first half of the year, the highest proportion since Experian Automotive (EXPN:LN) began tracking the data in 2007. That compares with 25 percent last year and 18 percent in 2009, as lenders pulled back during the recession. “Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas, an analyst with Morgan Stanley (MS), wrote in an October note to investors.
The money for subprime loans comes from yield-starved investors who buy bonds backed by them. Issuance of such bonds, which pay higher rates than U.S. government debt, soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, but still below the peak of about $20 billion in 2005, according to Harris Trifon, an analyst at Deutsche Bank (DB).
The interest rates on subprime auto loans can climb to 19 percent, according to Standard & Poor’s (MHFI). “Right now, you have to have fairly bad credit to be paying above 3 percent,” says Jessica Caldwell, an analyst with auto research firm Edmunds.com. Chrysler Group (F:IM) has been a beneficiary of the subprime boom. Fifty-eight percent of loans taken out to purchase its Dodge brand vehicles in October were above an annual percentage rate of 4.2 percent, the industry average, according to Edmunds. The average loan for a Dodge charged an APR of 7.4 percent, and 23 percent of the loans had APRs of more than 10 percent, making Dodge the brand with the highest percentage of loans at more than 10 percent, followed closely by Chrysler and Mitsubishi (7211:JP). Dodge’s U.S. sales rose 17 percent this year through October compared with a year earlier, propelling Chrysler Group to 43 straight months of rising sales.
About 13 issuers have raised money in the asset-backed bond market to make subprime auto loans this year, according to Citigroup (C). Among them are GM Financial, the lender known as AmeriCredit before it was acquired by General Motors (GM) in 2010, and new entrants such as Exeter Finance, owned by Blackstone Group (BX). Exeter has issued $900 million of bonds linked to subprime auto loans this year, data compiled by Bloomberg show. Exeter has higher loss rates compared with other lenders, S&P said in a Sept. 17 report. A spokeswoman for Exeter declined to comment.
While banks and investors in loans are looking for new ways to increase returns, what is dangerous is the potential outcome. Those with cars loans and business loans may end up defaulting, which doesn’t bode well for the economy.
by Liz Hester
Chinese asset management company Cinda is shaping up to be the hottest initial public offering of the holiday season. Hedge funds and other investors are pouring cash into the offering, hoping to capitalize on the growing pile of debt expected to go bad.
The Wall Street Journal offered this list of investors:
China Cinda Asset Management Co. has lined up 10 cornerstone investors to take up 44% of the funding it seeks to raise—up to $2.46 billion—in its initial public offering, people familiar with the deal said Sunday.
The offering is set to be Hong Kong’s biggest IPO of the year, and if the interest among cornerstone investors is any indication, it may be one of the more popular. The so-called bad bank, whose bread-and-butter business is buying up bad loans from Chinese banks and distressed assets from factories and real-estate firms, could benefit from an uptick in nonperforming loans in China.
The 10 cornerstone investors have together committed to buying $1.09 billion of the IPO.
New York-based Och-Ziff Capital Management Group LLC, which has a strong focus on distressed debt, and China Life Insurance Co. are taking $200 million each, the people said. Norges Bank Investment Management, Norway’s sovereign-wealth fund, is buying $150 million.
Three other investors, including San Francisco-based Farallon Capital Management LLC and Chinese fund Rongtong Capital Management Co. are taking $100 million each.
Distressed-investment specialist Oaktree Capital Management, a unit of the U.S.’s Oaktree Capital Group LLC, and Upper Horn Investments Ltd., a unit of Chinese power firm Guangdong Yudean Group Co., are buying $52.95 million and $50 million, respectively, the people said.
Reuters offered this background on the firm’s creation and how investors expect to make money as more people fall behind on their loans:
The offering is set to be the biggest in Hong Kong this year as global investors bet that soured loans will be a growth business in China. It opens a window into how the four firms have managed loans, investments and properties seized from companies unable to repay their lenders as the world’s second-largest economy slowed.
Cinda, the first of the four to launch an IPO, said in a filing to the Hong Kong Stock Exchange that total assets rose 11 percent to 283.55 billion yuan ($46.5 billion) as of June 30, compared to the end of December last year.
The next Chinese bad debt manager expected to pursue an IPO is Huarong Asset Management Corp, which hopes to raise up to $2 billion through a listing though no timetable has been set. Reuters reported the Huarong IPO plans in June.
Created in 1999 to handle the bad loans of China Construction Bank, the country’s No. 2 lender, Cinda said profit attributable to equity holders was 4.06 billion yuan ($667 million) for the six months ended June 30, 2013, up 36 percent from 2.99 billion yuan a year earlier.
In its IPO Cinda is offering 5.32 billion new shares in an indicative range of HK$3.00 to HK$3.58 ($0.39 to $0.46) each.
The MarketWatch story pointed out that the Chinese financial system is become more complex, creating both opportunities and problems for companies like Cinda that are trying to capitalize on the missteps of others:
In recent years, investment trusts, real estate and investment banking have been added to Cinda’s distressed-loan business. It also appears to have done well, with an operating margin of 28% in 2012 referenced in pre-deal research. No doubt China’s asset boom in recent years will have done its part to rescue some of these earlier bad loans.
But going forward, investors will need some comfort understanding its business model.
Indeed, reports suggest Cinda will be using funds raised in this listing — and then some — to help clean up China’s next batch of problem loans. The Financial Times says Cinda is ready to buy 100 billion yuan ($16.4 billion) in bad debt over the next two years.
As concerns mount that China is careening toward a new bad-loan cycle, the reception of Cinda will be a key gauge of how much confidence investors have that the lid can be kept on problem loans.
Optimists will hope that this listing exercise will, at the very least, bring a bit more transparency to China’s murky world of distressed debt.
At a conference on China debt-restructuring opportunities held in Hong Kong earlier this month, a key message was that the next bad-debt cycle will be tougher than the last one.
Not only has the size of China’s financial sector grown exponentially, but it’s also much more complicated. China’s banks are not just much bigger, but also now have operations and listings overseas.
The last time around, for instance, China cleaned up loans without outside help, and it appeared relatively painless, with problem loans taken on at par. This time, however, the size of the financial sector means it may not be realistic to expect a crisis to be handled alone.
And that’s likely why all these U.S. hedge funds and distressed investment vehicles are turning to Cinda. Yields on opaque foreign restructurings will likely be higher than the well-understood reworkings in the U.S. Anything that sheds more light onto the financial sector is a good thing, especially in a country as tightly controlled as China.
by Chris Roush
InsiderMonkey.com is a three-year-old site that focuses on reporting the news from insider trading and hedge fund filings.
The site, which has a staff of 10 writers, has at its primary goal attracting readers who are looking to outperform the market by following insiders and hedge funds. The site averages nearly 1.5 million visitors per month, and it became profitable 18 months ago. Insider Monkey also offers a premium newsletter for $399 a year.
The editor is Meena Krishnamsetty, who previously was an associate producer at Bloomberg Television and was on the afternoon news team at CNBC. She has a degree from the Columbia Graduate School of Journalism.
“Almost all of the hedge fund managers we get in touch with know and follow our website,” said Krishnamsetty in an email to Talking Biz News. “We have several hedge funds among our premium subscribers as well.”
Krishnamsetty said she has known the site’s founder, Ian Dugan, for 15 years. “Three years ago, he came up with the Insider Monkey idea,” she said. “He found a programmer and agreed to finance the site until it became profitable. We were three partners and everybody agreed not to receive any salary until this turned into a viable business.”
The site now is planning to add coverage of spinoffs, merger arbitrage and other special investing situations after it hires a new editor. The job posting can be found here.
Insider Monkey used to publish articles about technology stocks to attract traffic, but it now has a sister website where it covers business news about technology stocks.
by Chris Roush
Douglas A. McIntyre is editor in chief and chief executive officer at New York-based 24/7 Wall St., a finance news website. He has previously been the editor-in-chief and publisher of Financial World Magazine from 1983 to 1995.
He was also the first president of Switchboard.com when it was the 10th most visited website in the world, according to Media Metrix. He has been CEO of FutureSource, LLC and On2 Technologies, Inc. He has served on the board of directors of Vicinity Corp., The Street.com, and Edgar Online.
McIntyre is a magna cum laude graduate of Harvard.
24/7 Wall St. articles are republished by many of the largest news sites and portals, including MSN Money, Yahoo Finance, Aol’s DailyFinance, MarketWatch, Comcast and The Huffington Post.
The company publishes more than 30 articles per day and has readers throughout North America, Asia, the Middle East, and Africa.
The editors of 24/7 Wall St. do not own securities in companies that they write about. Other writers may have positions in companies, and these are disclosed in their articles.
McIntyre spoke by telephone with Talking Biz News on Thursday afternoon about 24/7 Wall St. What follows is an edited transcript.
How did the site get started?
Jon Ogg, who is my partner, and I had a few conversations seven years ago. I had been the president and publisher of Financial World magazine from 1983 to 1995, and at that point you could already see, before the Internet became a power, that postage was ruining that business. We look at what we thought was important about financial news and thought that doing it on the Internet was the only option. So we began the site in 2006.
What was the niche that you thought wasn’t being served by existing financial media?
I don’t think I ever viewed it as fulfilling an unfilled niche. We thought that there was room for a site that covered a lot of the same things that Barron’s did, but on a much, much smaller level, that Forbes did. The site has moved beyond that in the past seven years. But on the day that it started, it was to serve the high-end investment community.
Who do you see as your biggest competitors?
That’s a good question. I can’t figure out the answer to that. Now that the business media is not compartmentalized because there is a version of everybody’s publication online, it’s very difficult to say where people come when they come to your site. You can guess why they come.
There are little ways how CNN competes with CNBC and in some ways The Wall Street Journal. Some people say to me, you guys are a lot like TheStreet.com, and there are some aspects where that is true. And others say I find you similar to CNNMoney. And we do the much broader pieces that they do. I don’t think anybody is being completely honest if they say they know who they are competing with in the online business financial news world. It’s like a rugby scrum.
We like to think we’re helpful enough to our readers that they will come back. That’s all we can hope for.
And what all are they doing?
Three of those people only do research and writing for our long analytic pieces. Those run between 2,000 and 10,000 words. They work on nothing but that every day.
Jon Ogg and myself and two other people tend to work on stuff that is time sensitive. I start at 3 in the morning, and work on what is going on in Europe and Asia. There’s a period of intense reader interest that begins around six and keeps it momentum until about 9:45 or 10.
And then you’re grazing around, looking at what is going on, trying to find some unique way to look at things that everybody else is looking at. We might do something four or five times a day that you might not find anywhere else.
We might look at where Tesla buys its tires. It’s not a standard Tesla story. Covering the Tesla car fires, you almost have to do it. But it’s extremely hard unless you have someone who knows the car industry. It’s very hard to give the reader something about that that they’re not getting anywhere else. Everybody has the same story. If you look at the financial websites, except for those that literally have nothing but features, more than half of the stories are everybody looking at the same things.
How do you stand out from the crowd?
What you have to do for the reader is tell them what they’re not seeing, or what they should look at that maybe is not where their attention is being driven by a lot of the media coverage. As you know, there is generally more than one side to a given story. We try to look hard for sides or stories that are interesting, but not sensational. It’s more along the lines that if Tesla is having car fires, they lose. But with almost every loser, there is a winner. So saying to a writer, there is an aspect to the story that they’re not thinking about beyond what gets covered ad naseum. So you want to take the reader some place that is not obvious.
It’s hard to do, and sometimes we fail.
How do you decide what types of stories do you like to cover?
Out stories fall into two categories. We do a larger percentage than most business content sites do, of really long form journalism. We do a story every day that probably averages 3,000 ot 4,000 words and helps the reader look at something in depth.
We’ll have a story come out a 6 p.m. today that looks at how well managed each of the 50 states are. It will be well read, and I am sure it will get picked up by our large syndication partners and our portals. It won’t get picked up in its entirety because it’s about 10,000 words. But they will take snapshots of it, and they will send traffic to us to read the whole story. A lot of people want to hear what the article is about, and they might go to the article to read how they’re state is doing.
We try to do stuff that is national and local. We can’t be a complete site. But you try to give people a look at what is not obvious. That’s very hard to do.
Is your audience still upper-end investors?
It’s grown from there, so it’s more than affluent, well-read people. A lot of people on Wall Street and a lot of people in government. And the management at big companies. So it is broader than it was a year ago.
And where does your revenue come from?
The way we handle syndication is that no money changes hand. These larger websites run stories, and we have arrangements where traffic is sent back to us. So as that traffic comes into us, the advertising accounts for about 85 percent of the revenue that comes in. The search engine traffic is the rest.
Give me a feel for page views and visits.
ComScore shows our monthly visits at 1.3 million, while Google Analytics has us at about 2 million. So we’re about the size of Barron’s or Quartz, but smaller than TheStreet. So we sit in that tier of sites that is below the 5 million level, and there might be 10 sites that sit there in that 1.25 million to 2 million visitors strata.
And how profitable are you?
The one thing that is interesting about our model is that we were very concerned about being profitable from the beginning. We never took any money. And from a business model standpoint, that sets us apart. So for every dollar in revenue, we’re profiting 60 cents. We have eight people, and other than that, we have no expenses. We do no multimedia. We’re lucky if we put photographs in stories. And we have no apps. We just don’t spend any money on any of that stuff.
So we have gone the road not taken. It was very important for us not to give up control.
by Chris Roush
John McDuling of Quartz writes about how scoops about mergers and acquisitions are actually just well-placed leaks by companies and their public relations staffs.
McDuling writes, “A new study from the University of London’s Cass Business School, Mergermarket and transactional software company Intralinks argues that most M&A news is leaked intentionally, rather than uncovered through ingenuity or released by accident. Intralinks has a horse in this race: The company sells ‘virtual data rooms’ which are designed to enable secure sharing of confidential information between buyers and sellers during a sale process. Yet the research still paints an interesting picture.
“In 142 transactions involving a publicly-listed merger target between 2008 and 2012, there was no evidence of leaks, as measured by abnormal share price movements, before the start of the due diligence process (when a potential buyer is given the chance to look at at an acquisition target’s books). There’s plenty of potential for a leak at this stage of the proceedings: Companies are talking to each other, emails can be misdirected, documents lost. But leaks simply don’t happen, according to the study, because it’s in nobody’s interest for information that could potentially scupper the deal to get out at this stage.
“After due diligence begins, there’s still only limited evidence of leaking—until we get past the 40-day mark. Then leaks start to proliferate. The report puts this down to the fact that when due diligence is dragging on, it usually means negotiations have hit a roadblock. A well-timed leak to the media can help one side of the deal gain the upper hand—making it look like competition for an asset is heating up when it isn’t, for example. ‘Leaks look increasingly likely to be motivated by one party being unhappy with how negotiations are progressing and therefore choosing to leak information to push the deal in a direction they prefer,’ the report says.”
Read more here.
by Liz Hester
President Barack Obama nominated Timothy Massad, who ran the Troubled Asset Relief Program at the Treasury Department, to head the Commodity Futures Trading Commission. The move comes after Gary Gensler said he would leave once a successor was appointed.
Here’s some of the background from the Wall Street Journal:
Among Mr. Massad’s biggest challenges will be securing additional funds for an agency whose mandate has outgrown its budget. The CFTC, which oversees the $600 trillion derivatives industry, is operating with a budget of about $194 million, far short of the $315 million Mr. Obama has requested for the agency. Derivatives are financial instruments that allow investors, companies and others to hedge against risk.
Mr. Obama called on Congress to boost the CFTC’s budget, saying the agency is “undermanned, they are outgunned, they are working overtime.” He said the agency’s budget had fallen victim to opponents of the 2010 Dodd-Frank financial overhaul, who have “tried to starve funding for the agencies charged with carrying it out.”
The five-member CFTC has been operating with just four commissioners since Republican Jill Sommers stepped down earlier this year. Another commissioner, Democrat Bart Chilton, last week announced plans to leave before year-end. The Senate has yet to confirm Republican J. Christopher Giancarlo to succeed Ms. Sommers, and the pending departures of Messrs. Gensler and Chilton could leave the CFTC with just two commissioners—Republican Scott O’Malia and Democrat Mark Wetjen. Senate aides have said they expect Congress to simultaneously move the nominations of Mr. Giancarlo and whomever the White House nominated to succeed Mr. Gensler.
It isn’t clear how Mr. Massad, 57 years old, a onetime corporate lawyer, will approach some of the biggest issues facing the CFTC, including the push to ensure that U.S. banks operating abroad adhere to U.S. derivatives rules. Mr. Massad, who worked at law firm Cravath Swaine & Moore LLP for 25 years, focused primarily on securities matters while at the firm, though he also has “extensive knowledge” of the derivatives market the CFTC oversees through his corporate legal practice, the official said.
The New York Times detailed the CFTC’s expanding role in regulating Wall Street and its products:
Some consumer advocates also remain skeptical of Mr. Massad, a former corporate lawyer who spent more than two decades at Cravath, Swaine & Moore. They wonder whether he will strike as aggressive a tone as Mr. Gensler did.
Under Mr. Gensler, the agency has received plaudits for its crucial role in putting in place new rules on derivatives and futures trading as part of the government’s Dodd-Frank financial overhaul. In the face of Wall Street lobbying, the agency created dozens of new rules since Congress passed the overhaul in 2010.
The Dodd-Frank Act gave the agency new authority to regulate the exchanges, and the derivatives and futures contracts traded on those exchanges, expanding the scope of the agency’s jurisdiction. Mr. Gensler was an unapologetic supporter of the law, pushing the agency to tighten rules that Wall Street sought to loosen.
Derivatives tied to mortgages were the main accelerator of the financial crisis, helping to pump up a real estate bubble that led to a bust and the worst financial crisis since the Depression.
Since then, the agency has also imposed record fines on financial institutions. Among its most notable actions was a wide-ranging crackdown on the manipulation of benchmark interest rates, which reeled in major banks including Barclays and UBS.
The Associated Press story (via Time) pointed out that Massad would have to finish the rule-making process, meaning he’ll need to be tough on Wall Street:
Obama is expected to use Massad’s nominating ceremony to call on Congress to fully fund the CFTC, one of the smallest and most thinly funded U.S. agencies. The 2010 financial overhaul law gave the CFTC the task of laying down rules for oversight of derivatives, the complex instruments traded in a $700 trillion worldwide market that has been unregulated.
The agency has now completed 43 of the 60 rules it was charged with putting into motion under the overhaul law. By comparison, other regulators, including the Securities and Exchange Commission, have adopted roughly a third of their rules.
Massad would take over the task of implementing the remaining rules. For many, a key question is whether he will exercise independence from the administration and the banks, as Gensler often did.
Gensler, who had worked for nearly 20 years on Wall Street, surprised many by being a tough regulator of banks. He pushed for stricter rules that banks had lobbied against. And he wasn’t afraid to take positions that clashed with the Obama administration.
Massad has worked for the Treasury since Obama took office in 2009 and has been an advocate for the administration’s policies.
“The question is whether he has the guts, independence and commitment … to stand up to Wall Street,” said Dennis Kelleher, the president of Better Markets, a group that advocates strict financial regulation. “It’s a dramatically difficult job at an independent agency at a critical time.”
That’s always the biggest questions with regulators and how they’ll do their jobs. Here’s hoping that independence and fairness prevail at the CFTC.
by Chris Roush
Bradley Hope, a former foreign correspondent, has begun work at The Wall Street Journal on its Money & Investing desk, a spokeswoman confirmed Tuesday.
Hope is the market structure reporter.
Hope is formerly a Beirut- and Cairo-based foreign correspondent for The National newspaper, which is headquartered in Abu Dhabi. Hope reported from Egypt for two years and visited Afghanistan, Iraq, UAE, Oman, Libya, South Sudan, Angola, Egypt, Morocco, Tunisia, and Bahrain on reporting trips.
Hope is the author of “Last Days of the Pharaoh,” an Amazon Kindle Single about the power struggle inside the presidential palace of Hosni Mubarak during the 18-day revolution that forced him to resign.
Previously, Hope was the police bureau chief and features writer for the New York Sun. He is a New York University graduate.
by Liz Hester
The much-hyped initial public offering for Twitter is finished now that shares priced and made a lot of people rich on the first day of trading.
Let’s take a look at a small portion of the extensive coverage of the site’s first day as a public company.
Here are the basic facts from the Wall Street Journal’s Money Beat blog:
Twitter‘s highly anticipated trading debut was a success.
The social-messaging platform opened at $45.10 on the New York Stock Exchange Thursday morning, up 73% from the $26 initial public offering price. Twitter sports the biggest U.S. technology IPO since Facebook Inc. went public 18 months ago.
Twitter’s IPO comes at a time when the broader market has been doing quite well. The S&P 500 has risen in 16 of the past 21 trading days. It is up 8% over the past two months and has risen 24% this year.
Twitter shares finished at $44.90, up 73% for the day.
The Heard on the Street column had a great story about Twitter’s valuation and how to look through all the options, warrants and other shares to figure it out:
After pricing late Wednesday at $26, shares of newly public Twitter opened at $45.10 Thursday. According to most financial databases, that means the micromessaging service has a market value of $25 billion. That is open to debate.
Twitter’s initial public offering, like Facebook‘s FB -3.18% before it, provides a window into why it is crucial for investors to focus on diluted share counts and stock-based compensation when valuing highflying social media and tech companies. Failing to do so can lead investors to pay far more than they realize for a stock, a particularly big risk in Twitter’s case given its heady valuation.
Twitter’s $25 billion market-value figure is based on 555 million shares outstanding—the headline number in Twitter’s IPO filing. But such basic share counts don’t take into account options, warrants and restricted stock. Altogether, Twitter has 150 million such shares, according to its IPO filing, bringing its total share count to 705 million.
Another adjustment is necessary for options and warrants. When those are exercised, Twitter will receive cash equal to the number of options multiplied by their weighted average exercise price. For the purpose of analysis, investors typically assume a company will reinvest the combined proceeds into buying back shares. That lowers Twitter’s diluted share count slightly to 704 million.
But that boosts its market value to $31.7 billion—or $6 billion more than its capitalization based on a basic share count. This only intensifies the pressure on Twitter to demonstrate that it can bring its revenue in line with its lofty valuation, while emphasizing how frothy the share price is following its first-day gain of more than 70% above the listing price.
The New York Times had a great story about Twitter learning from the mistakes of Facebook and the differences in the offerings, which weren’t trivial:
The initial public offering of Mark Zuckerberg’s social network in 2012 was blowout, capitalistic excess. Twitter has carefully managed expectations. But both are a curious mix of cynicism and belief – redistributed among bankers, backers, executives and prospective investors. Still, when it comes to hyped-up I.P.O.’s, everyone seems most comfortable reacting to recent history.
Facebook’s float was an exercise in insiders extracting as much as possible, while surrendering little. Lead underwriter Morgan Stanley priced the stock at an overly generous multiple, and then raised the price and shares sold as mania sucked in the credulous.
Insiders dumped stock – most of the money raised went to them – because uncertainty surrounded the company’s business model. Growth was falling, and mobile posed a threat. Mr. Zuckerberg seemed to care more about his wedding the following day. Super-voting stock meant he could ignore stockholders. The stock’s open on Nasdaq was flubbed, and it quickly lost half its value.
Twitter’s float has been more finely tuned to rewarding new buyers – delaying future wealth removal by insiders. Backers are not selling any stock, so all the money raised furthers Twitter’s ambitions. There’s only one class of stock. Growth is accelerating, and mobile devices’ growth is wind at Twitter’s back.
So Twitter shareholders were the ones profiting today, not insiders, which is an interesting gamble, but likely bought them a lot of good will with investors. The Bloomberg story had a good section talking about money managers urging people to sell today, indicating the market may be overvaluing the company:
The pricing puts the onus on Twitter to deliver on its promises of fast growth after earlier pitching shares as low as $17. Chief Executive Officer Dick Costolo has rallied investor interest in Twitter’s rapid sales curve — with revenue more than doubling annually — even with no clear path to making a profit.
The company received orders for about 30 times as many shares as it offered at the $26 IPO price, a person with knowledge of the matter said. About 8 million of the shares, or 11 percent of the total in the IPO, were allocated to retail investors, the person said, asking not to be identified because the information is private. A typical retail allocation is 10 percent to 15 percent.
Still, any price over $40 reflects “hype” and makes Twitter too risky of an investment, said Jeffrey Sica, president and chief investment officer of Sica Wealth Management LLC in Morristown, New Jersey.
“I anticipated a very strong open, but when you start to approach these levels this is absolute froth,” he said. “There is nothing supporting this range. I think this is just way, way above what realistically we should be considering a stable open.”
Brian Wieser, an analyst at Pivotal Research Group in New York, downgraded Twitter to a sell rating with a $30 price target.
“If you’ve got it, sell it,” Wieser said in an interview. “If there are willing buyers who have a view of the business today that gets them comfortable with this valuation then those people should hold it, but I can’t get there, and I’m not recommending my clients to hold it.”
While IPOs might be returning to 2007 levels of valuation, hype and investor interest, it does make sense to keep in mind that it won’t last. Twitter seems to be benefiting from watching Facebook as well as incredible market timing. Either way, a more than 70 percent return on an investment is pretty incredible for one day.