Initial Public Offering - Research Paper Example

Underwriting firms assist the issuer in the IPO process by determining what type of security to sell to the public, how much to sell, and at what price to sell. One example of a large, strong private company that sought to become public is Google, which first sold shares to the public on August 19, 2004 at a price of $1.67 billion, fewer than ten percent of the total shares of the company, which made employees at Google instant millionaires (Webb, 2004). Like Google, Twitter is another successful, new internet company that faces the choice of whether to go public.

However, the decision to go public is complicated by the issue of the method of selling those first shares to the public: whether in an auction, online format like Google, or in a traditional format like other kinds of new companies. Twitter is a microblogging service that allows users to post updates. It was founded by Evan Williams under the banner of “Odeo” (Carlson, 2011). When Apple’s new iTunes made the new product worthless, Evans and his friends Biz Stone and Jack Dorsey created the concept for Twitter.

Together with Noah Glass, who developed the idea for Odeo, development began on the new concept, which meant more employees, a new office, and investors. Glass developed the name “Twttr” that eventually evolved into “Twitter”. Five years after Odeo’s initial founding, $5 million in investments had increased in value by one thousand percent, to nearly $5 billion. Given Odeo’s (and now Twitter’s) original context, it seems that the investor class most interested in the company are the kinds of analysts who were initially attracted to the promise of Google.

Today, the investor class that might be interested in the public promise of Twitter may not be so different from those who were originally interested in the concept of Odeo. Nevertheless, Evan Williams bought back most of the ownership in Odeo before its share prices skyrocketed, which narrowed the original investment pool considerably. Some of those original investors, knowing they missed a one thousand percent spike in prices, were part of the Silicon Valley demographic that invest in the early stages of hot new internet companies with the next great idea.

Considering the progress that a privately held Twitter has made in its young history, it seems that the investors who might be interested in holding the company as public shareholders may belong to larger funds and investment bankers, rather than the relatively minor, private shareholders that Twitter was accustomed to appealing to in its younger days. Clearly, an IPO of a company such a Twitter, which has substantial private assets, would create a large splash in the worldwide markets. Although the company may not be in critical need of financing for its short-term projects, an IPO would dramatically increase the market share of the company relative to its competitors.

In the traditional IPO, an investment bank underwrites the issuance of shares to the public by determining the price and amount of shares to be dealt. The underwriter then shops the shares around to wealthy institutional investors; based on their reception, the underwriter will allocate shares and collect a percentage of the IPO. This method is incredibly effective because it happens primarily behind closed doors with entities that handle a considerable