Props to Photographer: Andrew Harrer/Bloomberg for this dramatically lit picture of the Twitter IPO prospectus.
Two Investment Firms Almost Sure They Remember Being Hired to Sell Twitter Stock
This lawsuit against Twitter Inc. is pretty hard to follow but don't let that keep you from enjoying it. It seems that two investment advisers, Continental Advisors SA and Precedo Capital Group Inc., sued Twitter because, let me see if I can get this right, a company called GSV Capital* asked Continental and Precedo to sell some Twitter shares, and Continental and Precedo were pretty pretty sure that Twitter was really running the sale, though they never talked to anyone at Twitter, it just felt that way, you know, just sort of a Twittery vibe about the whole thing, blue birdies in the air and so forth. And so Continental and Precedo went around presenting to a bunch of investors and building a book of some $260 million in indications of interest, and then Twitter decided not to actually let them sell the shares, and so Continental and Precedo were out a lot of bother and client goodwill with nothing to show for it. And now they're suing, not GSV, which recruited them to sell the shares, but Twitter, which just sat there all smug letting them do their roadshow:
In an interview, Andreea Porcelli, managing partner at Continental Advisors, declined to explain why the plaintiffs were singling out Twitter and not GSV. However, she said that her firm was unable to get in touch with Twitter and had finally decided to sue.
“We have actually been trying to contact Twitter for quite a while,” Ms. Porcelli said. “This is our last stand.”
That's a sure sign of a client relationship, when you keep calling them and never hear back. No wonder Continental thought they were working for Twitter.
You can read the complaint here and it's a delight; there's a somewhat hard-to-follow but interesting thesis about how Twitter used this abortive private sale to make it look more valuable as it prepared for its IPO next week. But my favorite line is paragraph 67, "Twitter's misrepresentations to both Plaintiffs were so wanton and egregious that punitive damages are warranted," remember no one at either plaintiff ever talked to anyone at Twitter, so those egregious misrepresentations were presumably made via telepathy, I don't know, I admire their chutzpah.
Also from the chutzpah pile, Continental and Precedo think they're entitled to $24.2 million in lost "fees, commissions and expenses,"** for placing about $260 million of Twitter stock,*** which, nice work if you can get it? Of course they couldn't, but still, that's a 9.3 percent fee for underwriting a share sale, which is really quite a lot more than Goldman Sachs et al. will be getting for the actual Twitter IPO.**** If I'd hornswoggled someone into paying me a 9 percent fee to place some pretty in-demand stock, I might keep it to myself.
But as a former capital markets banker my delight in this lawsuit comes not so much from its loopiness as from the fact that it sticks up for downtrodden underwriters everywhere. I mean, here: Let's imagine that everything Continental and Precedo say is right and that Twitter really did engage them to run a multi-continent roadshow, meet with investors, talk up the price, take orders and ultimately come back to Twitter with a book of demand to buy shares -- and then pulled the plug.
That would be pretty crummy behavior by Twitter, no? But it happens to actual investment banks all the time. Continental and Precedo had some sort of alleged "mandate agreement" about their fees, but Goldman et al. presumably don't. Their fees are laid out in an underwriting agreement that Twitter will sign the night they price the deal. The roadshow that is currently going on is basically a freebie. If Twitter doesn't like the price, or comes up with a better plan, it can pull the IPO up until the last minute, and the banks get nothing.
The same rule normally applies to IPOs, bond offerings, mergers, whatever: The banks get paid if it happens, and don't if it doesn't,***** and the client keeps complete discretion up to the last minute. (Lots of other financial advisory work is on even worse terms: The banks work for free in the hope that the client will like them and hire them eventually for paying work.)
You can see why this would annoy bankers who work for months on a deal only to see a client get nervous and back out. And you can see why it might create bad incentives to push forward with a deal even if it's not in the client's interest, and to make as much money as possible off the deals that happen to subsidize the ones that don't. A norm of investment banking clients paying for advice and work, even if they ultimately don't transact, might improve the banker-client relationship for both sides. Although I suspect it wouldn't do much for the Twitter-Precedo-Continental relationship.
* A business development company that seems to own some $36 million of Twitter stock, so.
** That's in addition to the round One Hundred Million Dollars for punitive damages.
*** They seem to have had orders for $260 million though they were working on placing up to $278 million when the deal was killed.
**** Which seems to be 3.25 percent, though on larger size.
***** There are plenty of exceptions, particularly in M&A work.
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