Are BlackRock rational in valuing Twitter Valuing At $9bn?

BlackRock, the world’s largest asset manager, has joined hallowed company in Prince Alwaleed bin Talal, DST Global and Kleiner Perkins on the list of venture capital investors in the world’s largest micro-blogging company – Twitter. BlackRock acquired a stake of $80m last week, valuing Twitter at some $9bn.

Even though the recent IPO activity for social media companies, in particular Facebook, has scared many investors away and undoubtedly pushed down some unreal future expectations over valuations in the new “Web 2.0” mania, it seems that interest has not completely gone away, as the recent BlackRock investment in Twitter shows…

Twitter was founded in 2006 and has thus far resisted calls to go public. The BlackRock investment and other recent activity inside the company is most likely a precursor that this is about to change and Twitter is now preparing for a possible future IPO.

Given the partial failure of Facebook’s IPO, and which is still fresh in investors’ minds, Twitter may decide to wait a little longer before going public but, BlackRock’s purchase was likely one of the last opportunities to buy Twitter at  a “pre IPO” price.

Mike Gupta

Twitter has just hired ex-Zynga employee Mike Gupta as new CFO and Mike Davidson, who founded Newsvine, as VP of Design. Ali Rowghani shifted from CFO to COO and is also helping existing employees to cash out some of their stock to avoid pre and post-IPO problems. While Facebook allowed employees to sell freely in the secondary market prior to the IPO, by helping employees selling shares directly to some investors, Twitter may avoid unnecessary leaks of insider information to the public regarding the company strategy and financials. At the same time, it may be better to let employees sell now instead of facing a post-IPO volatility period as occurred with Facebook when the lockout periods ended and a large number of employees tried to sell shares.

In December 2010, the Silicon Valley investor Kleiner Perkins was the first significant investor trying to jostle for a piece of the Twitter cake. At that time, it spent $200m on its stake and which put a value on Twitter of $3.7bn. A few months later, it was giant Russian asset manager, DST Globa who acquired a stake of some $800m. A few months made all difference however as DST’s purchase effectively doubled the valuation of Twitter – just under $7bn. In December 2011, Twitter glamour spread to the Middle East and succeeded in seducing Prince Alwaleed bin Talal from Saudi Arabia who splashed out $300m for a stake in the company. This month, BlackRock joined the list of private equity investors with a $80m stake.

At present, it looks like Kleiner Perkins may have been the smartest of all with, on paper, almost a 150% profit, albeit based on a much smaller equity injection by BlackRock. It looks like the BlackRock investment was largely to facilitate employee share sales and also to put a floor under the final IPO price. The stake of $80m is too small to be anything over than such a maneuouvre in our opinion.

A Twitter IPO will be the opportunity for Jack Dorsey – the company’s founder to cash out some of his billions if the current valuation holds. Do we think that what is in essence, really a large scale central email system, is worth a value approaching $10bn? I think you know the answer to that – about as much as we think ADVFN is worth £30m!!!