Twitter can take IPO lessons from Facebook -- on what not to do

Facebook's feeble offering offers a cautionary tale on how not to take a popular company public

As Twitter gears up for an initial public offering, its executives should study Facebook's path to an IPO to learn what not to do.

Twitter made its IPO plans official last week by filing S-1 documents with the U.S. Securities and Exchange Commission.

The social network is now preparing for its financial roadshow, where it hopes to woo skeptical Wall Street investors.

The frenzy that initially surrounded Facebook's initial public offering in May of 2012 quickly cooled once trading began -- the share price ended the day as it started. In the days and months that followed, the first day's result would have been adequate as the share price sank well below its initial offering price of US$38 a share over time.

The world's largest social network hit its low point last September when the stock hit $17.55 per share

It took more than a year for Facebook's shares to return to the opening day price. The company's strengthening mobile position is credited with boosting the Facebook's financial profile in recent months.

"I think Twitter is gun shy from Facebook's IPO," said Jeff Kagan, an independent analyst. "Facebook didn't take it seriously. [Mark] Zuckerberg showed up in a sweatshirt at investor meetings. That was insulting. They thought they were bulletproof and then found out they weren't."

Millions of users love social networks and the chance to update friends and family with posts and tweets about weekend fun, political issues and their thoughts on the big game.

Investors, though, don't care about retweeting jokes and posting Vine videos. They only care about making money.

Last month, Facebook CEO and co-founder Mark Zuckerberg laughed when asked at TechCrunch's Disrupt conference what advice he had for Twitter executives as they readied for an IPO. "It's funny on its surface because I'm the last person you'd want to ask how to make a smooth IPO," he said. "It's a valuable process."

Analysts say Twitter executives can learn from mistakes Facebook made during and after its IPO period.

For instance, investor enthusiasm and confidence in Facebook waned quickly when Facebook set an opening price of a beefy $38 per share. Facebook also increased the size of its IPO by about 85 million shares days before its IPO, another factor in the IPO debacle.

"Twitter needs to learn not to be too full of itself," said Kagan. "I'd rather see them come in lower with a stock price than higher. Investors will be more satisfied if they buy low and then increase, rather than fight an uphill battle for a whole year, generating stories about whether this company will survive or not."

Facebook's vision of itself didn't match up to investors' visions of the company, he added. "They thought they were much bigger than they really were so they had to spend the last year rebuilding. It took them a year to lick their wounds," Kagan said.

Facebook also got a lot of attention, mostly negative, during a pre-IPO roadshow that saw a 28-year-old Zuckerberg show up at major Wall Street meetings wearing a hoodie sweatshirt. While ultra casual attire is his trademark, it didn't make a good impression on the suit-and-tie clad professionals on Wall Street.

The financial community saw Zuckerberg as a kid who didn't respect the business world or the big players in it.

"Mark Zuckerberg was seen as aloof and full of disdain towards Wall Street, which was translated as disdain for investors as well," said Dan Olds, an analyst at Gabriel Consulting Group. "This meant that every misstep by the company came under greater scrutiny and generated more negative news than might have been the case if Facebook and Zuckerberg were seen as respectful of Wall Street."

Olds also suggested that Twitter, as much as it's able, avoid negative bombshells before its IPO.

Just days before Facebook's IPO, for instance, a major customer, General Motors, cancelled a $10 million advertising deal with the social network. The automaker concluded that its paid ads on Facebook weren't helping it sell products.

Rob Enderle, an analyst at Enderele Group, suggests that Twitter create a so-called rapid-response PR team to keep such negative news from spinning out of control before its IPO.

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