Twitter, the social media business that boasts 218 million
monthly users, is floating on the stock market soon – reportedly shooting to
raise $1 billion. Its managers will hope the initial public offering is a lot
more successful than the share float of Facebook last May.

In the months immediately after
Facebook’s IPO (taking its debut at a price of more than $38 per share), the
social media firm’s stock slumped; the IPO was also hit by technical glitches
on the Nasdaq exchange and the experience revived painful memories of some of
the frothier dotcom activity in the 1990s. However, Facebook’s share price
closed on Thursday, October 4 at $49.18 per share. So after all the angst, the
journey has been well worth it for the long-term investor, it would seem.

And that, says UK private bank Kleinwort Benson, is the
take-home point from analysis it has run on a crop of recent IPOs in the US,
Europe and elsewhere. Don’t get sucked into deals by the pre-launch excitement
and play a long-term game, is its message.

Gene Salerno, head of equities at the bank, says IPOs are “no
sure thing”. He and his colleagues have crunched the numbers for IPO return
data for the past 10 years. The bank says it can see how the capital-weighted
aggregate of IPOs have performed for one year after the float. The average
annual excess return (over S&P 500 Index of US stocks) for US IPOs has been
2.6 per cent per annum (year ending September 28), indicating out-performance. By
contrast, the results are -3.5 per cent for European IPOs (against MSCI Europe
inc UK Index) and a shocking -10.2 per cent for UK IPOs (vs All Share index of
UK
equities).

In the UK,
if one drills down further, performance is as follows: 2003 +7 per cent
out-performance against the All Share; 2004 +9.6 per cent; 2005 +4.4 per cent;
2006 -8.8 per cent (under-performance); 2007 -22 per cent; 2008 -21 per cent;
2009 -10.7 per cent; 2010 -4.6 per cent; and 2011 -30 per cent.

“Over those same ten year time-frames, only six of the 10 years
saw out-performance from US IPOs versus four years where IPOs underperformed the
S&P 500. The ratio has been worse in Europe, where six of the last 10 years
of IPOs failed to outperform their market indices,” Salerno says.

“If the company is attractive, long term investors would
often do better to buy in the aftermarket when the froth has blown off the
shares, and when they can be sure they can buy the size of investment they
want,” he concludes.

So when the Twitter IPO does take place, investors need to
take the long view and not get too distracted by the inevitable media jamboree.