The Ingenious Back Door into the Twitter IPO

By Marty Biancuzzo, The Daily Reckoning Oct 4, 2013, 10:46 AM 

Hindsight is always 20/20.

Every investor I know can reflect on “the one that got away.” The blockbuster investment that they missed the boat on.

Twitter actually has another, lesser-known version of GSV. And when Twitter goes public, I believe there’s more upside in this company…

For me, that year was 2006.

I was visiting family in Rhode Island for Thanksgiving. During dinner, I said to my cousin (an avid investor)…

“Apple’s about to launch this new product called the iPhone that’s guaranteed to revolutionize the mobile industry and transform its business in a major way. If I had the money, I’d throw it into Apple right now.”

My cousin did. I didn’t. And the rest is history.

At the time, Apple (AAPL) shares were just under $90. But within a year, they’d shot to around $200.

Sadly, once-in-a-lifetime investments (like Apple) are rare.

But killer trades happen all the time.

And on the back of my recent column about Twitter’s upcoming IPO, this little-known company in Japan is about to become one of them…

When you think back to Facebook’s (FB) IPO in May 2012, it doesn’t bring back happy memories. The stock tumbled from a $42 IPO price to under $20 in three months.

But what you probably don’t remember is the positive effect that its debut had on the company’s initial funders.

Like GSV Capital Corp. (GSVC), for example.

GSV is a business development company (BDC) that specializes in funding for emerging growth companies and venture-backed private companies.

Facebook was one of those companies. And when it went public, GSV’s shares more than doubled in a matter of months.

Fast-forward to today… and a hefty 15% of the company’s assets are locked up in Twitter now, too.

As rumors of a Twitter IPO began to swirl – and with the news now confirmed – investors who missed the boat on GSV’s involvement with Facebook have compensated for it by gobbling up GSV shares in anticipation of Twitter’s launch.

While it’s tempting to follow the crowd, Twitter actually has another, lesser-known version of GSV. And when Twitter goes public, I believe there’s more upside in this company…

Tokyo, Japan is the headquarters of venture capital incubator, Digital Garage (4819: Tokyo).

The company was founded in 1995 and is a major player in Japan’s internet market. In fact, DG’s founder, Joi Ito, is considered one of the world’s leading internet moguls.

Its reputation is such that when foreign companies want to gain a presence in Japan, they recruit DG as a consultant. LinkedIn (LNKD) is one of them, and it’s no surprise that when Twitter wanted to fire its social media service into the Japanese market, the company established a relationship with DG in January 2008, too.

And when I say “relationship,” I mean that as a business incubator, DG helped fund Twitter. In fact, it was one of the earliest investors, back when Twitter was unknown.

While the specific amount isn’t disclosed, DG has made at least five separate investments in Twitter since the company was valued at $100 million. Analysts estimate that DG now owns between 2% and 5% of the company.

A company that’s now valued at around $10 billion.

Clearly, DG has played a significant part in Twitter’s growth. And that makes it well-placed to reap the rewards from a successful Twitter IPO.

Because of this relationship, however, Japanese investors wrongly assume that DG mostly focuses on the social media area.

For example, look at the way its share price has closely followed Facebook’s over the past year.

Lest you think this is an anomaly, I dug a bit deeper and also compared DG’s stock performance to Japan’s own version of Facebook – Mixi (2121: Tokyo). Again, not too dissimilar, until the stocks started to break apart a few months ago. DG has headed higher, while Mixi has trickled lower… just as rumors began to swirl about a Twitter IPO.

Investors who think DG is all about social media are wrong. The company isn’t just a one-trick pony…

As I said, Digital Garage is a major player in the internet industry. Social media only accounts for a fraction of its business. Among its other internet and technology holdings…

~ VeriTrans: In 2012, DG spent $157 million to buy Hong Kong’s VeriTrans – an e-commerce and credit card network like PayPal. The move generated $10 million in profits for DG in fiscal year 2012.

~ (2371: Tokyo): DG also owns a 20% stake in Tokyo-based Kakaku – a fast-growing company that owns a group of consumer-based websites. Among the services it offers are the Japanese equivalents of, Trip Advisor and Tabelog, which is Japan’s version of OpenTable (OPEN). Tabelog accounts for 13.7% of Kakaku’s revenue – revenue that’s steadily increased over the past few years…

The main upcoming catalyst for a pop in DG’s share price is a successful Twitter IPO.

While it’s tough to tell exactly what DG’s stake in Twitter is, here’s what we can say: The company began investing when Twitter was barely worth $100 million. If its stake is now between 2% and 5% and Twitter is now worth an estimated $10 billion, it’s in a solid position.

Having helped fund the company, DG holds a privileged position as an inside investor. As such, it’ll be able to get right into the heart of the IPO action and profit from a rise in Twitter shares.

If that scenario doesn’t play out… well, DG has plenty of other holdings like Kakaku to offset any disappointment. And as the stock’s recent impressive rise shows, the company is doing just fine anyway.

One caveat: Digital Garage trades in Japan, so if you want to participate, your brokerage will need to be able to trade foreign stocks.

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