The Use of an Auction-Based IPO for Twitter - Essay Example

? An IPO for Twitter? Ryan Rickert TUI Being the third largest social – networking site in the United s, powered by its global onlineaudience, Twitter should use the auction – based IPO instead of the traditional IPO when they decide to go public. Twitter is a social networking and microblogging service site that allows you to key in messages up to one hundred and forty characters called “tweets”. My goal in this paper is to support and defend my decision that it is best to use an auction – based IPO when Twitter decides to go public. An IPO is an acronym that stands for Initial Public Offering which refers to the first sale of stocks by a privately owned company to the public. IPO’s are often used by younger and smaller companies to expand their business but are also used by privately owned large companies to become publicly traded (Investopedia, 2911). When Twitter makes the decision to go public along with their new commercial accounts and advertisement programs, it is best for Twitter to use an auction – based IPO to acquire and bring more profit to the company. Auction – based IPOs utilize the internet to open the bidding of their stocks to interested investors. In order to underwrite the IPO, Twitter will need an investment bank. This would cost less compared to the traditional IPO underwriting process. A road show would be provided to educate investors about the company’s offerings and the company itself. Additionally, this type of IPO is beneficial for Twitter because auction – based IPOs open the bidding of their stock through the internet allowing a larger set of investors to participate. Lastly, and most importantly, Twitter would have a share price closer to the market value as opposed to the share price in traditional IPO; this would mean there will be a higher return of profit for Twitter (Kadam, 2009). While in the traditional IPO, Twitter would designate a specific investment bank to underwrite the IPO. Both Twitter and the assigned investment bank would probe the market value of the company, researching the market value and identify the required capital they would need for the expansion of the company. Twitter and the investment bank would then identify the cost of each share and how many shares could be made available to the investors. The true market value would be discounted from what Twitter and the investment bank came up with because this acts as the investment bank’s commission from Twitter. For this reason, Twitter would have a lower cost on the auction – based IPO for the underwriting process. After identifying the number of shares that can be offered and the share price of the IPO. In the same way as an auction – based IPO, a road show would be given to the investors to educate them about the offering and about the company itself. Once the road show is completed, shares are then allocated to investors. The advantage of using a traditional IPO is stocks are much higher than the initial price when the trading begins (eSSORTMENT, 2011). There are disadvantages with these types of IPOs. In an auction – based IPO, it would cost them less capital if the company and the investment bank overestimate the value of the stock. If this occurs, the company would not meet their target capital, which translates in a shortage of funds for the company’s expansion. Also, there would be less return of investments for investors because the share price in this form of IPO is close to the market value allowing the profits to flow in the company’s favor (eSSORTMENT, 2011). Another example of a risk in using the auction – based IPO is when the system gets hit by a virus after opening the stocks for bidding to the interested investors. This occurrence would violate the state and federal security laws of the investors. This obstacle can really happen because the opening of the shares is through the use of the internet making it very possible to get hit by the said virus (Hildreth, n.d.). The disadvantage in a traditional IPO is investment banks take commission from the shares making it far from the market value allowing the profit of the company to decline. Furthermore, there are additional charges to the investment bank’s underwriting IPO process; for example, the investment bank’s commission would cost the company extra fees. Another example of a risk in using the traditional IPO is that you will never be sure if there will be a market even after the company has filed and complied to the necessary expenses of the IPO process. Metastorm is a technological company who has experienced this type of obstacle (Patton, 2009). Based on their description, three types of investors Twitter would likely attract would be: Savers, Speculators and Specialists. I believe Twitter would attract Speculator investors primarily. Savers are investors that are willing to wait for a long period of time as long as the return of their investment is consistent. They do not make an investment strategy like the specialists do, savers entrust their money to financial planners and money managers to dictate their investment moves. Specialists are investors who educate and experience the field they want to invest in. They have this so called “blueprint” as a plan to achieve their investment goal, while a speculator is an investor who looks for the next big thing. Speculators do not rely on time as savers do; they believe a bigger return lies around the corner if you invest at the right time and the right place. These are the investors that Twitter would attract primarily because of Twitter’s status that they are one of the fastest growing companies in the United States and ranked as the third largest networking site. If I am a speculator investor, Twitter would be the best company for me to invest in. Speculators would do almost anything to get high returns, they are not afraid to invest in anything as long as they have a strong reason to invest in a certain company (Threetypes, 2007). One can always learn from the past when looking at investors and companies that went through the IPO process. We can learn a few things from Google and Morningstar from their auction – based IPO. The first thing we can learn from these two is that the auction – based IPO process is a beneficial way of going about the IPO process. Due to investment banks not having control of allocation shares, there is a higher investment return for the company. In addition, it is a fair system; shares are given to those who bid correctly, not only to individuals who are wealthy, influential or have some type of societal status. Even first time investors can participate in this form of IPO, giving opportunities to investors who have just started, allowing companies a larger set of potential investors. Validation of this process is being held up because Morgan Stanley, Deutsche Bank Securities and William Blair do not want to validate the process because they are afraid it would become a trend. If auction – based IPO becomes a trend, it would cost investment banks billions because they will no longer have control on the allocation of the IPO shares, which is one of their greatest sources of income (Carter, 2005). Therefore, the auction – based IPO is the most advantageous and beneficial process for Twitter to use. It would help them achieve their goal to acquire more profit on upcoming commercial accounts and advertisement programs. Not only will it help them acquire their profit goals related to commercial and advertisement, but it would allow Twitter’s share price to be closer to the market value allowing more profit for Twitter as well. It would also cost them less due to lower fees on the underwriting process of the IPO compared to the traditional IPO process. Lastly, an auction – based IPO launched through the internet gives twitter an edge for a larger set of investors. Not only does it provide a larger set of investors, it allows it to be a more streamlined process since Twitter is an internet based company. References Womack,B.,Valerio,C. (2010, Jan. 20). Twitter Operating Chief Says IPO is Still ‘Way Out’ (Update1). Retrieved from http://www.bloomberg.com/apps/news?pid=newsarchive &sid=afhiY_eWZq8M Carter,A. (2005, Jan. 10). Morningstar Follows Google’s Lead. Retrieved from http://www.businessweek.com/bwdaily/dnflash/jan2005/nf20050110_8372_db035.htm eSSORTMENT. (2011). Traditional IPO vs. Auction – based IPO. Retrieved from http://www.essortment.com/traditional-ipo-vs-auction-based-ipo-24886.html INVESTOPEDIA (2011). Initial Public Offering - IPO. Retrieved from http://www.investopedia.com/terms/i/ipo.asp#axzz1Q3tXIYnw Tweeternet. (2011) Twitter Explained. Retrieved from http://tweeternet.com/ Threetypes. (2007). Three Types of Investors. Retrieved from http://www.threetypes.com/philosophy/investor-types.shtml Kadam,P. (2009). Traditional IPO vs. Auction – based IPO. Retrieved from http://toostep.com/debate/traditional-ipo-vs-auction-based-ipo Patton,J. (2009, Aug. 18) Unknown Risk Involved in a Traditional IPO. Retrieved from http://fundingyourgrowth.wordpress.com/2009/08/18/hello-world/ Hildreth,T. (n.d.) Google’s Dutch Auction IPO: Is There a Take Away Lesson For The Rest of Us? Retreived from http://www.mclane.com/newsroom/articles/corporate/google.php Read More