If Twitter’s Price Shoots Up When It Opens Today…

If twitter ‘pops’ when it opens for the first time later today, it will say a lot. It could either mean that the demand is really great for the stock which drove up the price of the shares, or it could mean that the offering was under-priced. Those of us who are interested in initial public offerings (IPOs), pricing and how these deals are structured, will find this interesting.

Two Theories On IPO Pricing

Illustrated Twitter Logo Photo by Andreas

Based on this NPR article, there seems to be at least two ways to look at pricing an IPO. Based on how twitter priced their IPO, they are looking for that first day pop, the article reasoned. What’s a pop? That’s when a newly opened stock shoots up on its opening day of trading. Some investment bankers/brokers try to manage the IPO process in order to achieve this positive market reaction on the opening day. In Jamaica it would be hitting that 15% circuit breaker (maximum allowed in one day, which most of the junior market companies have achieved in recent times).

However there’s a second school of thought. If a new stock shoots up on opening, it could mean that it may have been priced incorrectly, and the firm going public is the one that would have lost out. Bill Hambrecht is an investment banker based in San Francisco in the NPR article says that an opening pop doesn’t benefit the firm going public but instead the brokers. It’s also interesting to hear him speak about how Steve Jobs questioned the IPO process. Listen to the NPR news story.

He goes on to say;

When founders under-price an IPO, money that could flow into a fledgling company to finance growth goes to Wall Street insiders instead. And in the last year, five companies that went public saw their stock price shoot up more than 100 percent on the opening day of trading.

Hambrecht says that’s not a sign of success. It’s a disaster.

At the end of the day, what is he saying? ‘… we’ve been trying to say, hey, you should really approach this as anybody would who’s selling any asset. Find a fair price.’

I hope Jamaican brokers and companies intending to list have been doing this.