It's good news/bad news for the Twitter IPO today. The company has raised its price range to $23-$25 per share, suggesting strong demand. It also faces an intellectual property infringement claim from IBM -- relating in part to ad technology.
To address the upside first: At the upper end of its new range Twitter would raise as much as $2 billion and be valued at $13.9 billion. (The earlier range was $17-$20, with a midrange market cap of about $10 billion.) The higher price can be spun a few ways. Does it hint at higher-than-expected demand, as some reports have suggested? Or simply prove that the underwriters are, as a rule, exercising caution in setting IPO price ranges?
In the ad-tech sphere, the recent experiences of Criteo and Rocket Fuel may be illustrative. Both companies raised their price range in the weeks prior to their public offering (Rocket Fuel once and Criteo twice). Underwriting banks prefer to start low and leave some "upside" in the price – in other words, price conservatively. If a new stock IPOs with some pent-up demand in its price, that helps ensure the ticker keeps climbing.
"Nothing is worse for bankers than a busted IPO, which is when the stock breaks below the IPO price on first day of trading," Richard Fetyko, SVP Internet tech and media for ABR Investment Strategy LLC. "This creates angry investors who won't do IPO deals with you anymore or will be hesitant to do so if bankers get too greedy trying to price a deal to the highest price of marginal buyer."
In other words, it might have been more surprising if Twitter hadn't increased its price range.
And for the bad news today: Twitter is on the receiving end of a patent-infringement allegation from IBM, it disclosed in an updated S-1 form. The challenge covers three patents, including one related to advertising. U.S. Patent No. 7,072,849 covers a "method for presenting advertising in an interactive service." Here's the language in the S-1:
"From time to time we receive claims from third parties which allege that we have infringed upon their intellectual property rights. In this regard, we recently received a letter from International Business Machines Corporation, or IBM, alleging that we infringe on at least three U.S. patents held by IBM, and inviting us to negotiate a business resolution of the allegations. The three patents specifically identified by IBM in the letter were U.S. Patent No. 6,957,224: Efficient retrieval of uniform resource locators, U.S. Patent No. 7,072,849: Method for presenting advertising in an interactive service and U.S. Patent No. 7,099,862: Programmatic discovery of common contacts."
Regarding the defensibility of the patents and future legal exposure, Twitter said:
"Based upon our preliminary review of these patents, we believe we have meritorious defenses to IBM’s allegations, although there can be no assurance that we will be successful in defending against these allegations or reaching a business resolution that is satisfactory to us. Further, from time to time we may introduce new products and services, including in areas where we currently do not have an offering, which could increase our exposure to patent and other intellectual property claims from competitors and non-practicing entities. In addition...some of our agreements with advertisers, platform partners and data partners require us to indemnify them for certain intellectual property claims against them, which could require us to incur considerable costs in defending such claims, and may require us to pay significant damages in the event of an adverse ruling."
IBM did not respond to a request for more information by press time.
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