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November 13, 2013 - No. 131

Twitter's First Day of Trading

The Necessity for an Alternative

Twitter's First Day of Trading
The Necessity for an Alternative
Class Privilege Destroys the Socialized Economy

Twitter's First Day of Trading

The Necessity for an Alternative

The Twitter initial public offering (IPO) became the 193rd IPO in the U.S. this year. The owners of Twitter recently sold 13 per cent of their privately held shares in the company to institutional investors for $1.82 billion divided into 70 million shares or $26 per share. These shares became available for public trading on the New York Stock Exchange on November 7. The first trades took almost two hours to match sellers and buyers with the first price reported at $46 per share. By 4:00 pm, 117 million Twitter shares had been traded. The $20 immediate increase in price meant a big payout for the favoured buyers who were offered the stock at $26 before its being publicly traded. As trading began, the 70 million initial public shares suddenly had a market worth of $3.2 billion, a $1.4 billion increase for their owners in a matter of days. And the rich get richer.

The financial institutions received a potential $1.4 billion plus service fees from the IPO and the Twitter Company $1.8 billion in new cash. Twitter says it needs the money to finance its company, especially since it has not yet discovered a way to realize the service it provides except through selling advertisements, which is inadequate.

The remaining bulk of the Twitter shares are held by various individuals and several companies that bought into the company during the last few years. As of September 30, 2013, Twitter had 474,696,816 shares of common stock outstanding (including preferred stock) and 128,482,939 shares of common stock subject to outstanding equity awards and warrant exercises. The $44 per share trading price puts the market value of the company stock at around $27 billion. Company stock of principal individual owner Evan Williams is worth $2.7 billion, that of Jack Dorsey $1.2 billion and CEO Dick Costolo $368 million.

The financial enterprises given the opportunity to buy the initial 70 million shares and earn service fees say they deserve the payout since they took a risk as the share price could have fallen. The companies that benefitted from the rise in the IPO share price in addition received from 3.5 to 5 per cent of the market price for providing brokerage and other services. The names of the companies involved are well known including: lead underwriter, Goldman Sachs; additional underwriters, JP Morgan, Morgan Stanley, Bank of America, Merrill Lynch, Deutsche Bank, Allen & Co, Code Advisors.

The 193 IPOs this year translate into a very profitable one for the big financial institutions. These are mostly the same companies deemed "too big to fail" in 2008, resulting in the government giving them billions in public money through the Troubled Asset Relief Program (TARP) to purchase their "troubled" assets and equity. In addition, the U.S. Treasury funnels public money into their hands through the privately-controlled (or public-private-partnership) U.S. Federal Reserve. This new money, which is generated electronically rather than printed, is provided through the federal government's QE1 and QE2 (quantitative easing) programs. Since 2008, the public funds handed over this way now exceed $4 trillion with an additional $85 billion flowing every month. The new money put into circulation is greater by far than the U.S. growth of goods and services during the same period.

The chart (below) shows the growth in the U.S. M1 money supply, which is the broadest indicator of money in circulation, compared with U.S. GDP growth, an indicator of the production of goods and services.

The QE program effectively gives the financial institutions money to engage in IPOs, lending and other activities. It keeps interest rates low generating extensive borrowing. This borrowing includes money to buy stocks. The collective price of stocks listed on U.S. markets has now reached record high levels. The number of stocks purchased on margin is also reportedly at record levels.

An article in Forbes.com says, "NYSE margin debt has soared to levels that marked the peaks of the prior bubbles in 2000 and 2007. This shows that traders are so confident in the market's prospects that they are leveraging their bets with borrowed money, which is further boosting the market by increasing traders' buying power." ("Twitter's IPO Is More Proof That Tech Is in a Massive Bubble" - Jesse Colombo)

The Globe and Mail writes, "The U.S. Federal Reserve's easy money policies, plus the big gains by stock markets this year, have created a voracious appetite for new shares and made big first-day gains [for IPOs] a regular occurrence. The number of IPOs in the U.S. has jumped 60 per cent to 193 this year from last year, the highest level since the tech bubble at the turn of the century. A similar upsurge is evident in the Toronto Stock Exchange, where IPOs raised $2.1-billion in the first nine months of this year, a dramatic increase from the $397-million raised in the same period a year earlier, according to Pricewaterhouse Coopers. [The trading prices of] U.S. IPOs this year have jumped by an average of 17 per cent on their first day of trading .... Twitter's huge first-day gain wasn't even the best performance for an IPO this year. Six offerings have doubled or more on their first day of trading .... That compares to just eight IPOs that doubled on their first day between 2001 and 2012." ("Twitter Joins the Party: Investor Demand Soars for New Stock Offerings")

The auto monopolies have used the low interest rates and abundance of money in the financial system to induce purchasing of vehicles on credit, including a growing number of subprime auto loans. Even flipping of homes has returned in those regions of the U.S. hardest hit in the subprime mortgage crisis of 2008 (California, Arizona, Nevada and Florida).

The saturation of the economy with a money supply well beyond its growth in goods and services does not bode well. The mobilization of this money into schemes for its redistribution and concentration within the hands of a few, to serve the narrow interests of the private monopolies and to pay for the U.S. military, its ongoing wars, war preparations and special ops is a recipe for yet more crises and global disasters. The prediction is for significant inflation, rising interest rates, widespread bankruptcies, and yet more unemployment, economic chaos and crises.

In contrast, the people demand control over the collective wealth, its use and distribution. The people demand that money should be mobilized for the reproduction of the economy and for investments in public services and social programs to guarantee the well-being of all and their rights, and to humanize the social and natural environment.

The state monopoly capitalist system is incapable of healing itself; it needs the firm hand, and advanced thinking of the working class to move the economy forward in a new direction. The recurring economic crises prove that the monopoly capitalist economy cannot resolve its problems and does not work. Owners of monopoly capital who control the economy, political institutions and state treasury refuse to recognize that a new direction for the economy is required. The organized and socially conscious people must deprive finance capital of its power to deprive the people of control over the basic economy and the collective wealth that is rightfully theirs. The working class and its allies are charged by history to develop an agenda that charts a new direction for the socialized economy that resolves its contradictions and steers it away from the recurring crises, which cause the people so much pain and suffering and waste so much of its actual and potential value.

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Class Privilege Destroys the Socialized Economy

In preparation for Twitter's initial public offering (IPO) the company filed a prospectus with the Securities and Exchange Commission, which contains recent financial statements and details of equity ownership. Next, it came to an agreement with favoured financial enterprises on buying the initial allotment of 70 million shares for $26 per share. Twitter gained $1.8 billion for its coffers in the sale of these shares. The company made only the 70 million shares available for public trading on November 7. Some of the remaining shares will start trading next February, with the bulk owned mostly by Twitter executives and directors to begin trading in May.

The initial sale price of $26 when multiplied by the total number of outstanding shares held by the ownership group became the estimated equity value of the company. According to the prospectus, the number of outstanding shares was 690 million giving the company an estimated equity value of $18 billion.

At the close of public trading of the 70 million Twitter shares after the first day, the market price of one share had jumped over 70 per cent to $44.90, with the first trades at $46, which was $20 higher than the IPO $26 price paid by the big financial enterprises. The closing higher price meant a potential windfall of over one billion dollars for the privileged owners of the initially traded shares. Twitter stock owners of the 70 million shares made 117,701,700 trades of those shares on the first day of trading. After the first trades for $46 dollars, the price rose as high as $50 and closed at $44.90. Taking the closing price as a low average, $5.285 billion changed hands amongst traders of Twitter shares on that first day alone with the initial owners making a big score.

This corrupt activity seriously harms the socialized economy and undermines its reproduction. Money is taken out of the economy and concentrated in the hands of a few. Also, U.S. Treasury money funneled into the hands of the big financial enterprises for this reckless activity distorts the value of the currency eventually weakening its buying power causing price inflation.

The ruling elite are incapable of restricting this parasitic activity because they benefit from it using their positions of class privilege. History demands of the working class an enormous effort to organize itself, wage actions with analysis in defence of the rights of all, and arm itself with modern definitions and social consciousness to put an end to this decaying economic system dominated by class privilege. Only the organized working class can chart a new direction for the socialized economy that assures its reproduction without crises so that the people's well-being and rights can be guaranteed.

Twitter's Fictitious Valuation

The higher market valuation of the company on the first day of trading jumped up the equity or market value $13 billion to $31 billion. The large jump in the price shows that both valuations are fictitious, speculative and self-serving.

The details of the first valuation arriving at $26 per share are not public knowledge, and the second market valuation is clothed in hype. Much of the initial money involved could be traced back to the U.S. Treasury and Federal Reserve's two recent programs of quantitative easing, which have made four trillion dollars of additional public money available to the largest financial enterprises. This destructive activity is reflective of the outmoded private relations of production that control competing parts of the basic sectors of the socialized economy.

In sharp contrast to both the $18 billion and $31 billion valuations, Twitter's financial statements and website reveal a much different situation for the company. As of June 30, 2013, the company possessed:

- property and equipment (net value): $242,553,000
- cash and cash equivalents: $164,509,000
- short-term investments: $210,549,000
- Accounts receivable: $123,709,000
- Prepaid expenses: $23,953,000
- net intangible assets: $14,439,000
- goodwill: $163,715,000
- other assets: $20,632,000

Total assets: $964,059,000

Total liabilities: $255,898,000

Net tangible and intangible assets: $708,161,000

Twitter produces 500 million tweets a day. It has 215 million global users of its service, which is provided free of charge.

Forty million people are users of Twitter's Vine service, through which users share 6 second clips of video. It is also a free service.

Twitter does not pay any dividend on its stock.

The evaluation of Twitter at $18 billion or $31 billion is not believable for a company that has only 2,000 employees in offices around the world, even though it says 50 per cent of those workers are engineers. Economic law says the valuation of the service Twitter provides arises from the work-time of its employees and the transferred-value from material consumed in the production process. To sustain an average rate of return on capital of $18 billion or $31 billion would require tens of thousands of workers producing value with many of those workers of high quality in terms of education and health.

Twitter has never made any equity profit, only interest profit. In 2011, Twitter had gross income of $106.3 million, which was $128.3 million short of meeting claims on added-value and transferred-value.

In 2012, gross income was $316.9 million, which again was short $79.4 million.

In the first six months of 2013, Twitter's gross income was $253.6 million but this was short over the six months from claims on added-value and transferred-value by $69.3 million.

Eight-five percent of Twitter's income derives from advertising with the rest coming from licensing of data to third parties.

Media reports say that prices for ads on Twitter have been falling. Also, the growth of the company's user base is slowing, which is natural over time given the already large size of its user base.

Three-quarters of Twitter's regular users live outside the United States, but three-quarters of the company's ad revenue comes from within the country. Global competition, especially from Asia, is emerging for the user base of this type of service, especially given the espionage and military applications of the service. Control over the service (and the entire Internet) is increasingly seen as an aspect of defence against U.S. threats and bullying. This will make global growth of ad income very difficult for Twitter.

The Twitter valuation was for purposes of gambling on the stock market and making a big score for a privileged few at the expense of weakening the socialized economy.

The Twitter Board of Directors is comprised of well-placed representatives of finance capital including agents from Rupert Murdoch's News Corporation (Fox Entertainment), Netscape, E*Trade Financial Corporation, Gemstar, Safeco Corporation (Liberty Mutual Group), Sun Microsystems, etc.

Two examples are used to compare the Twitter valuation, one from material production and the other a service company. The first valuation is larger and the second one smaller than that of Twitter. The context is to show the Twitter evaluation as highly subjective and self-serving on the part of those who stand to gain from this parasitic activity.

First example:

Praxair Inc.: largest U.S. producer of gases available for practical applications, and supplier of high-temperature and corrosion-resistant metallic, ceramic, and powder coatings, mainly to the aircraft, plastics and primary metals markets.

Compared with Twitter's 2,000 workers, Praxair has 26,539.

Compared with Twitter's 2012 gross income of $316.9 million and loss of $79.4 million, Praxair had a gross income of $11.224 billion and net income of $1.692 billion.

In spite of the wide difference in number of workers and gross and net income, Praxair's market capitalization is only approximately $5.8 billion more than Twitter at $36.873 billion. On November 7, Twitter's was $31 billion.

Second example:

National Bank of Canada: the sixth largest full service bank in Canada.
Gross income: $5.313 billion CAD (2012)
Net income: $1.634 billion CAD (2012)
Employees 19,920 (Oct, 2012)

The National has a market capitalization of $14.918 billion, less than half Twitter's valuation.

Both Praxair and the National Bank pay regular dividends to shareholders while Twitter does not.

The Twitter valuations are a fraud and scam for purposes of making a big score for a privileged few at the expense of the socialized economy.

Note on the Promotion of Twitter and Certain Other Social Media

The U.S. imperialist state highly values Twitter and wants to see it grow within the U.S. and abroad as a weapon in its overt and covert fight for global hegemony and to subvert the people in the U.S. in their fight to defend their security and rights, and for an anti-war government. The Twitter service is integrated with the U.S. state military and espionage agencies. The service plays an increasing role in U.S.-led regime change and fomenting of violent tribal, religious, ethnic and other clashes. The U.S. imperialists have successfully used Twitter and Vine to spread gossip, rumours and disinformation in small unchallengeable and unverifiable chunks of words and video. This has aided the U.S. espionage agents and military to generate chaos and upheaval in targeted countries. This activity is also aimed at generating support for big power intervention in sovereign countries under the imperialist hoax of "responsibility to protect."

Twitter also spreads celebrity worship of leading figures of U.S. imperialist culture. Twitter and other U.S.-controlled media weaken targeted states and pave the way for subversion and direct U.S. military involvement throughout the world, especially at this time in West Asia and throughout Africa and to wreck public opinion opposing imperialist war and violation of the sovereignty of nations. The drive for U.S. world hegemony is aimed at seizing control of markets, sources of raw material, workers and strategic regions.

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