Khamis, 7 November 2013

The Star Online: Business

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The Star Online: Business

All that Twitter is gold or tech bubble?


NEW YORK/SAN FRANCISCO: Twitter Inc shares jumped 73% in a frenzied trading debut that drove the seven-year-old company's market value to around US$25bil and evoked the heady days of the dot-com bubble.

The strong performance on Thursday is encouraging for the venture capitalists who have backed other consumer Web startups, such as Square or Pinterest, though it sounded alarm bells for some investors.

"@twitter opening at $45/share? Almost 50x revenues! We are officially in another tech bubble," tweeted financier and investment advisor Steve Rattner.

The stock closed its first day of trade on the New York Stock Exchange at US$44.90 a share after hitting a session-high of US$50, nearly double the initial public offering price of US$26 set late on Wednesday.

Twitter could raise US$2.1bil if an underwriters' over-allotment is exercised, as expected, making it the second largest Internet offering in the US behind Facebook Inc's US$16bil IPO last year and ahead of Google Inc's 2004 IPO, according to Thomson Reuters data.

Fans believe that Twitter, which has 230 million users, has established itself as an indispensable Internet utility alongside Google and Facebook, and that it has only scratched the surface of its potential as a global advertising medium.

"When people use Twitter they are following certain people, they're searching for specific information," said Mark Mahaney, an analyst at RBC Capital Markets. "There are powerful marketing signals that are almost Google-esque, something that Facebook doesn't really have."

The IPO was shadowed for months by Facebook's troubled 2012 debut, in which the shares quickly fell below their offering price amid trading glitches and subjected the company and its lead banker, Morgan Stanley, to accusations that they had been greedy in pricing the deal.

Twitter's opening appeared to go off without a hitch, prompting Anthony Noto, the Goldman Sachs banker who led the IPO, to write a simple Tweet: "Phew!"

Still, Twitter may find itself subject to the opposite criticism, that it had priced the shares too low and left more than a billion dollars on the table.

"In my mind they certainly could've raised the price on this thing and gone into the low 30s," said Ken Polcari, director of the NYSE floor division at O'Neil Securities. "From an outsider looking in, I would say they were overly cautious because they didn't want a disaster on their hands ... I'm sure the company didn't want a Facebook debacle. I get that, but I think they were overly cautious and it cost them some money."

The 70 million IPO shares represent about 13% of the company's common shares. Twitter was the most actively traded stock on Thursday, with around 117 million shares changing hands.

Heavy demand for the IPO was apparent before the final pricing. Twitter was able to price the IPO above an already raised indicative range, and the deal still attracted investor subscriptions that totaled 30 times the number of shares on offer, according to market sources.


At Twitter's headquarters in San Francisco, offices opened early and hundreds of employees flocked to the 9th floor cafeteria to watch the festivities on TV while eating "cronuts," a croissant-donut hybrid, made by Twitter's resident chef, Lance Holton.

The IPO is the latest milestone for a service that was born out of a nearly-defunct startup in 2006 and was derided by many in its early years as a silly fad dominated by people talking about what they had for breakfast.

But Twitter quickly began to penetrate popular culture in unexpected ways, with its open design and broadcasting format attracting celebrities, athletes, politicians and anybody who wanted to share short, punchy thoughts with a digital audience.

Its business potential developed more slowly, and the company appeared to be floundering as recently as three years ago, when it was riven by management turmoil and frequently crippled by service outages.

Under Dick Costolo, who took over as CEO in October 2010, Twitter has rapidly ramped up its money-making engine by selling "promoted tweets," messages from marketers that are distributed to a wide-ranging but targeted group of users. In the third quarter, Twitter had US$168 million in revenue, it said, more than double from a year prior.

The NYSE, which snatched the listing away from its tech-focused rival, Nasdaq, marked Twitter's debut with an enormous banner with the company's blue bird logo along its Broad Street facade.

British actor Patrick Stewart, of Star Trek fame, rang the opening bell at the Big Board together with nine-year-old Vivienne Harr, who started a charity to end childhood slavery using the microblogging site.

"I guess I represent the poster boy for Twitter," Stewart said, who had only been tweeting for about a year.

Costolo and Twitter's three co-founders – Evan Williams, Biz Stone and Jack Dorsey – appeared on the packed exchange floor.

At current valuations, the stakes owned by Williams and Dorsey would be worth around US$2.7bil and US$1.1bil, respectively. Costolo, who invested US$25,000 in the fledgling company in 2007, holds a 1.4% stake worth about US$360mil.


Investor enthusiasm for the microblogging company defied traditional valuation analyses. The shares traded at about 22 times forecast 2014 sales, nearly double the multiple at social media rivals Facebook and LinkedIn Corp, even though Twitter is far from turning a profit and posted a loss of almost US$70 million for its most recent quarter.

The hefty valuations were cause for celebration for Twitter insiders and venture capital backers, such as Union Square Ventures, Spark Capital and Benchmark Capital.

But some analysts warned that a correction may be in store.

"With a price that pushes into the high 30s and beyond, Twitter is simply too expensive," Pivotal Research's Brian Wieser wrote in a note cutting his rating on the stock to "sell" from "buy".

"One way to justify a US$45 price in our model would involve presuming that Twitter could generate more than US$6bn in annual revenue by 2018. However, we think that would seem overly optimistic."

Fund managers who got small allocations at the IPO were hopeful the stock would trade down after Thursday's pop.

"We have a target of $40 and we won't buy more as long as it is trading above that," said Mark Hawtin, portfolio manager of the GAM Star Technology Strategy.

Jerry Jordan, manager of the US$48.6mil Jordan Opportunity Fund, who got a small allocation, said he would buy more of Twitter if it trades down around US$30-US$35.

"A lot of these sexy IPOs have a big pop on the first day and then they grind sideways," Jordan said.


As Twitter's stock soared after the opening, the company's market value, including restricted share units and other securities that could be exercised in the coming months, was over $28 billion.

The company said in its investor prospectus that more than three-quarters of its users are outside the US. Some of its most active markets now include Japan, Indonesia, Brazil and Saudi Arabia.

The fast-moving, mobile service was credited with fuelling popular protests that upended the Arab world in 2011. It served as a lifeline to the outside world for its users during natural disasters like Hurricane Sandy, and also instantly relayed news such as early rumblings of the 2011 US raid on Osama bin Laden's compound in Pakistan.

"Twitter has, when coupled with the increasing distribution of smartphones and reach of the Internet, an impact on global connectivity and transparency," said P.J. Crowley, the former US State Department spokesman. "It has definitely contributed to the acceleration of the news process and helped to expand the availability of information sources to a wide range of people."

The three most-followed accounts belong to a trio of pop stars: Katy Perry, Justin Bieber and Lady Gaga. U.S. President Barack Obama comes in fourth.

The 140-character messages have spawned an Internet culture of its own. The "hashtag," a pound symbol devised by early Twitter users to denote the topic of a conversation, has became ubiquitous, with the word even becoming an ironic expression parodied by the likes of Saturday Night Live.

Twitter's successful debut is likely to stoke interest in other up-and-coming consumer Internet companies such as ride service Uber, scrapbooking site Pinterest, accommodation service Airbnb and the payment start-up Square, all of which boast private-market valuations well north of a billion dollars and could go public in the coming years.

Kevin Hartz, CEO of Eventbrite and an early investor in Pinterest and Airbnb, said the IPO floodgates might open now.

"The pendulum is swinging back in a surprising way," Hartz said. "There's a pent-up supply of a lot of quality companies."

Still, two early social media success stories, Groupon Inc and Zynga Inc, have suffered major reversals since going public. Groupon, despite big gains in its shares this year, still trades at less than half its 2011 IPO price. Zynga is worth about a third of its 2012 IPO price.

And first-generation social media firms such as MySpace have all but vanished as fickle users moved on to the next big thing – Reuters.

Twitter and the coming crisis


NEW YORK: The bad news is: we are going to have another crisis.

The good news is that by then promoted messages on Twitter will make it easy to find bankruptcy attorneys.

Yes, this was the week that Twitter went public at a stratospheric valuation and the Federal Reserve, in two papers, set the stage for yet more aggressive monetary policy.

Those events are linked, of course, and though it may take a while, both will bear some bitter fruit.

Twitter, a great but overvalued company, is likely to ultimately disappoint investors. That may well happen when an overly confident and aggressive Fed finally gets its comeuppance. Or rather gets the latest in a repeating series of comeuppances.

First, let's look at Twitter, which opened at US$45.10 per share, 73% above its IPO price. That put its market cap at about US$32bil, or 53 times sales, making it the most expensive single technology stock on a price-to-sales basis.

Even if we forecast stupendous growth, this is a stock which will struggle in the next couple of years to produce sufficient profit to justify even current pricing.

Not only is it considerably more expensive than Facebook and Linkedin, for the US$32bil you could buy cereal maker Kellogg and semiconductor company Advanced Micro Devices, and have another $10 billion or so to play with.

I can't shake the feeling that technology shares are suffering from, for want of a better phrase, irrational exuberance.

You never get a bubble without a good story, and rarely without some earth-shaking change in technology, but it also helps if you have one more thing: loose monetary policy.

That we have, in abundance. Judging from the noises coming out of the Fed, we may well soon be about to make a great leap forward in radical monetary policy.


Two significant papers by Fed economists were released in conjunction with a conference this week.

The one which got the most attention, by William B. English, J. David Lopez-Salido and Robert J. Tetlow, argued that the Fed can cause unemployment to drop more quickly by pledging to hold interest rates pinned to zero for longer than they do now. (

Called forward guidance, this is a policy under which the Fed simply tells the market what it will do and waits for the market to duly reprice credit in response.

The paper argues that the Fed could use a lower unemployment threshold for rate rises than its current 6.5%, perhaps 5.5%.

But will investors genuinely believe a forward commitment by the Fed, or any other central bank, for that matter?

"Forward guidance is a stupid academic fantasy grabbed by those who wish to escape making real policy," former Bank of England policymaker Adam Posen said on Twitter.

"Cheap talk is not credible, especially given uncertainty and committees."

(Yes, I do see how perfect it is that policy is being panned on the genuinely wonderful but overpriced Twitter on the day of its IPO, which Fed policy helped make so successful.)

And though markets are not behaving as if the Fed will be looser for longer, I have my doubts about how much they will believe it when they pledge to become less loose.

The second paper, by David Reifschneider, William W. Wascher and David Wilcox, posits that following a damaging crisis, a central bank might do less damage to the economy by fomenting a second crisis by holding rates low than by raising them to avoid a bubble and bust. (

This paper centres on the concept of "optimal control" – essentially specifying what you will tolerate as a central banker in terms of inflation, unemployment and other variables, and then making assumptions about how policy and the economy will interact.

This is, significantly, a technique which has been approvingly cited by Fed chief-to-be Janet Yellen in the past.

Again, this only works if, first, people believe the Fed will do what it says it will, and, second, that the Fed is actually good at forecasting and understands how the economy works.

Neither point is believable.

It is impossible to know if this is simply musing, or if this represents an evolution of thought at the center of the Fed. Nor can we know how successful Yellen might be at pushing forward guidance and lower target unemployment as policy.

What seems clear – and you only need look at Twitter to see it – is that the markets believe that monetary policy will be good for risk assets.

Two financial busts in 13 years apparently aren't enough – Reuters.

China's troubled solar panel makers see the light, on farms


HONG KONG: China's loss-making solar panel makers believe they may have found a way out of their nightmare – by becoming one-stop renewable energy shops with their own solar farms.

Manufacturers of solar panels, hit hard by the scaling back of solar-power subsidies in Europe, are taking advantage of a new package of government subsidies at home and diversifying into solar-power generation.

In an apparent bid to prop up its ailing solar panel sector that has been hit by overcapacity, as well as price and trade wars, Beijing unveiled a plan in July to quadruple solar generating capacity to 35 gigawatts (GW) by 2015. Construction costs are estimated at US$50bil.

Spurred by a package of initiatives from tariffs to tax breaks, and continued low panel prices due to global oversupply, many of the country's panel makers are now looking to invest in solar farms to help return to profitability, industry officials say.

"Definitely the trend is Chinese manufacturers will make more downstream investment," said a senior official at Chinese solar panel maker Canadian Solar. "Now the domestic market seems to be particularly exciting."

For manufacturers, generating projects mean a predictable source of demand for their panels. Manufacturers are still mostly losing money, although panel shipment has improved this year on orders from China, Japan and the US.

Solar plant development is a more lucrative business. They offer an annual gross return of around 10%, depending on the proportion of debt financing and project location.

As solar panel prices tumbled following the 2008 global financial crisis, many Chinese wafer, cell or modules makers, like GCL Poly, Canadian Solar and Hareon ventured into solar power generation projects at home or abroad to offset manufacturing losses.

Overseas rivals such as SunPower and First Solar Inc, have also diversified into the higher-margin business as solar panel prices remain weak.


China's panel makers, among the world's biggest producers, were lured back home this year by the government's plans to expand the solar power producing industry. The policies have set off a scramble by the likes of state power producers China Huaneng Group and China Merchants New Energy Group as well as manufacturers like Shunfeng, Yingli Green and JA Solar .

JA Solar said in August it planned to develop 300MW of generating projects in northern China's Hebei province, in what its CEO Jin Baofang said was a major step "to increase the role project development plays in our overall revenue mix".

Shunfeng Photovoltaic, a small Chinese solar cell maker listed in Hong Kong, has said it will enter agreements to develop 1,079MW of solar power projects and have 600MW in operation or under construction by the end of 2013.

To ramp up its own manufacturing capacity aimed at catering for the expansion of its solar generation business, Shunfeng last week announced a plan to purchase the main unit of Chinese solar maker Suntech Power.

Shunfeng has offered 3 billion yuan (US$492mil) to take over bigger rival Wuxi Suntech, the bankrupt unit of Suntech Power. Wuxi Suntech filed for bankruptcy protection in March, after its parent defaulted on a US$541mil convertible bond – one of the biggest defaults by a Chinese company.

The deal could increase Shunfeng's solar cell capacity by five times to over 2,000MW.

Analysts warn of financial, regulatory and technical risks. Previous investments in Chinese projects have been hurt by issues like delays in subsidy payments and poor infrastructure.

Like their overseas peers, Chinese panel makers may eventually spin off their power plants by listing them or selling them to funds and insurers to take profit and alleviate potential funding strains, analysts say. China's top 10 solar makers have 100 billion yuan in debt, with an asset to debt ratio above 70% on average, state media say.

"What we may see is an increased level of listings and spin-offs into Hong Kong and elsewhere to try to build up some sort of vehicles to house these type of assets," said an energy banker at an international bank – Reuters.


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