Twitter and RM on the market : and it's the posties that del

[TrueBlueTerrier]

Twitter and Royal Mail on the market – and it's the posties that deliver

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Yes, Silicon Valley floats normally fly, but if you want to talk attractive valuations snail mail comes in first

Which communications company do you prefer? Company A has been around for 500 years, has an annual turnover of £9bn, makes profits of £400m and offers a dividend yield of 6% or thereabouts. It has more than a few challenges on the industrial relations front and its main service is in decline but it can claim credibly to be at the heart of a big trend – the growth of online shopping.

Company B is seven years old, had revenues of just $316m (£196m) last year and has never made a profit. Last year's losses were $79m (£49m) and there is no prospect of a dividend. Its service is definitely popular since there are 215 million users and industrial relations are wonderful because many of the employees are set to become extremely rich. But its challenge is to convert popularity into meaningful revenues and profits.

Undecided? Would it help to know that unprofitable company B – that's Twitter, of course – could be priced at $12bn (£7.5bn), or more than twice the value of profitable Royal Mail? Each to his own, but prudently minded investors should opt for the good ol' UK postal service, coming to market next week.

We are, by now, used to sky-high tech valuations. Even so, it's remarkable that the rumoured $10bn-$15bn for Twitter has generated so little debate. Even with another six months of growth under its belt, the company is still generating annual revenue per user of only $2 – call it two first-class stamps.

The great hope is that companies will pay to unleash a wave of advertising and Twitter users will accept that commercial messages are the price to be paid for a free service. Both ends of that proposition are untested. Facebook, it is true, has covered itself in ads but the character of Twitter may be different: its fast and furious nature may not lend itself so easily to becoming an online billboard or distributor of money-off vouchers.

Or, as the "risk factors" section of the prospectus puts it, users may "believe their experience is diminished as a result of the decisions we make with respect to the frequency, relevance and prominence of ads that we display". You bet: if Twitter, which bills itself as a service "shaped by the people, for the people," introduced a no-ads button many of "the people" would press it.

In reality, of course, Twitter's flotation will probably fly since Silicon Valley floats usually do; even Facebook has rewarded the faithful by surpassing its starting price. But, at the mid-point, we're talking about a valuation for Twitter of 15 times this year's expected revenues, with profitability to be achieved sometime thereafter.

It's the perennial problem of how to value high-growth companies versus utility-like plodders. At these valuations, the vote here goes to the plodder.

Royal Mail red letter day

As it happens, the great British punter, plus fund managers of many nations, seem to like the look of Royal Mail at the advertised price range of 260p-330p, or £2.6bn-£3.3bn. Interest in the float is said to be red-hot.

In these circumstances, the government must not be afraid to price the shares right at the top of the range. Its duty is to ensure the public pursue receives fair value. After all, we are all paying for the pricier stamps that have helped to transform Royal Mail's finances; and the company's old pension fund is now the state's responsibility.

A first-day bounce in the share price of, say, 5% would not cause non-shareholders to splutter on the cornflakes and scream about a giveaway. The pricing must be keen but the investment bankers running the sale have to be allowed some margin for error.

But a 15% jump would be another matter. The "lost" value for the state then might be considered 20p per share. That would equate to about £120m in real money if the government ends up selling 600m shares, or a 60% stake. The sum is a drop in the ocean in the context of the national debt. But £120m can buy a lot. Hell, the government could fund one whole mile of its beloved HS2 high-speed railway.

America and the point of extreme idiocy

Still, pennies on Royal Mail's share price will be a side-show if political standoff in Washington has caused panic in financial markets by this time next week, ahead of the 17 October deadline for the US to increase its borrowing limit, aka the debt ceiling. Warren Buffett, usually a wise judge of these political dramas, has good and bad news. "We will go right up to the point of extreme idiocy, but we won't cross it," predicts the great man.

Here's a rough plot of how events might unfold, courtesy of an old-hand fund manager:

President Obama cannot budge because he cannot ruin his presidency and authority by being held hostage by the Tea Party wing of the Republican party. In any case, his package of healthcare reforms was passed by Congress two years ago. So it has to be the Republicans who blink. And, indeed, there are tentative signs of that happening. John Boehner, Republican speaker of the House of Representatives, is reported as saying he would not allow a dangerous default. But the cost of backing down for the Republicans could be a fracturing of their party. To take that step, they need a strong excuse.

A mini-crash on Wall Street might fit the bill. The US Treasury's warnings of the "catastrophic" impact of default would then seen to be credible and real. The Republicans could then retreat while claiming that, unlike Obama and the Democrats, they took the decent and patriotic course by putting the immediate interests of America first. Conceivably, there might even be a long-term electoral gain for them. The critical point, though, is that Wall Street would have to freak out before the politicians truly feel the heat. Then share prices could return to where they were; the whole process could happen in an afternoon.

It's a theory and, amid the baffling world of Washington power games, it makes some sense. So, hold on to your hats. The minor wobbles on Wall Street this week may not have been enough. More drama, more warnings from the IMF and higher stakes may yet be required. But extreme idiocy is definitely the right description of events.