An IPO for Twitter Essay Example | Topics and Well Written Essays - 1000 words

An IPO for Twitter - Essay Example 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 â €“ 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. ... 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