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Twitter's Rumored IPO: Best, Worse Case Scenarios

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By William Peacock, Esq. on September 06, 2013 12:53 PM

The rumor mill is churning, and it looks like the next big tech-IPO could be the social network and micro-blogging platform Twitter. The rumors have reached a fever pitch as Twitter has made a number of strategic hires that point in the direction of a public offering, such as hiring Mike Gupta as the company's CFO. Gupta previously helped take Zynga public, according to BuzzFeed.

If indeed the company is planning on going public, it can learn lessons from two recent, and similar IPOs: that of LinkedIn and that of Facebook.

The Best Case Scenario

LinkedIn is a beast, and no one saw it coming. When it went public in 2011, the company set share prices and expectations low. Since then, it has consistently beat prices, beat expectations, and amassed wealth of data on business professionals worldwide. Big data is big money, especially to advertisers.

Glenn Soloman, at TechCrunch, outlines another reason why the company has been so successful: it has built a scalable business with multiple avenues for growth. It began as a social network for professionals. Now, it has Talent Solutions (a jobs board), Marketing Solutions, and Premium Subscriptions.

The company has been so successful on Wall Street, that it recently announced that it would issue more shares in a sell-off valued at $1.2 billion, three times the amount of its IPO.

The Worst Case Scenario

While LinkedIn set IPO prices low, and left money on the table as a result, Facebook took the opposite route and set prices (and expectations) extremely high, leaving CNN to ask "What the %$#! happened?"

While the NASDAQ glitch was out of the company's hands, the plummeting share prices, and expectations were not. Though the company's shares have recovered since then, especially as it has began to realize some of its mobile advertising potential, it fell more than 50 percent in its first few months on the market, and overall, has not had anywhere near the success of its professional counterpart, LinkedIn.

Unanswered Questions

In all likelihood, we won't know which path Twitter takes until early next year. If they price too high, they face an uphill battle to reach expectations. If they aim too low, they cede money to early investors.

One other important question to watch: the "controlled company" designation and stock classification system. Many tech companies, including LinkedIn and Facebook, are controlled companies, which exempt them from many of the SEC's protections against mismanagement, such as independent corproate appointments and detailed disclosures.

Also keep an eye on the stock classification system. According to ZDnet, Mark Zuckerberg, the founder of Facebook, gave himself 57.1 percent of the voting share of his controlled company. He has complete, unchecked power over everything from appointments and corporate acquisitions to the flavors of ice cream in the cafeteria.

According to MSN Money, big investors may have learned from the failures of Zynga (nearly dead), Facebook (recovered), and Groupon (recovered after ousting its founder), and may push for more control, and more preferred stock, in future IPOs.

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