Initial Public Offerings Essay

In actuality, Twitter is one of the most successful online social networks in the world. At the same time, the development of the social networks like Twitter raises the problem of the social networks going public. At this point, it is worth mentioning that the great potential of social networks, especially Twitter for online business are evident but many companies still face substantial difficulties with using their full potential. In this regard, Twitter is not an exception. To put it more precisely, Twitter has taken decision to go public and this decision is very important because within the last year, when the company has just started to earn money and came into business, the company has managed to gain considerable profits, whereas going public opens even wider prospects for Twitter to become one of the major players in the online business and one of the most successful online companies close to Google and other behemoths of online business. In such a context, the question concerning the choice of the effective type of IPO Twitter should choose arises. In this regard, it is possible to choose among the variety of types of IPOs available at the moment but Twitter should take into consideration the experience of such companies as Google and Morningstar, who have faced substantial problems while going public and their experience may be helpful for Twitter in the choice of the proper and effective type of IPO.
Before choosing the type of IPO, Twitter should define clearly what the type of investors Twitter is likely to attract. In this regard, it is worth mentioning the fact that the company should take into consideration the fact that its major benefits Twitter can gain online is advertisement and advertisers are the most interested party in Twitter going public. Therefore, advertisers are likely to be attracted by Twitter and they may invest substantial funds in the IPO.
At the same time, it is possible to presuppose that other major players in the online market are likely to be attracted by Twitter. For instance, Google may be and is interested in Twitter. In fact, Google has already started a close cooperation with Twitter, whereas in the future, as internet and social networks will progress, Google will be more and more interested in Twitter and its potential as a social network attracting the huge audience worldwide.
In addition, such companies as Microsoft and other developers of software and information system and technologies may be interested in Twitter after IPO. In fact, Twitter does need software to maintain its services running smoothly and Microsoft as well as other large software companies may supply software and information technologies for Twitter. On the other hand, Microsoft and its rivals may be interested in Twitter as the major consumer of their products. At the same time, through Twitter they can introduce new products and software and sell them to customers en masse using the audience of Twitter as the target customer group.
However, while going public, Twitter should take into consideration the lessons learned from Google and Morningstar from their auction IPOs. In this regard, it is worth mentioning the fact that Google and Morningstar attempted to apply the egalitarian principle of sales and IPO led to the loss of control over the shares of the companies and their independence and objectivity has become under a threat. To put it more precisely, through providing equal opportunities for all shareholders, Google and Morningstar opened the opportunity for major players in the target markets being involved in trades and acquiring a large part of shares of Google and Morningstar. As a result, the independence and objectivity of Morningstar has been under a question since the company has run public. However, it is the objectivity and independence of Morningstar that put the company in an advantageous position in its industry. In such a way, the experience of Google and Morningstar proves that going public is challenging and companies should pay a particular attention to the selection of the target shareholders, while selecting the egalitarian principle may lead to misbalancing shareholders of the company and put under a threat its business reputation and public image, which comprise an important part of the market value of any company in the contemporary business environment, especially such companies as Twitter, which is one of the largest social networks in the world. In such a way, Twitter needs to choose an effective type of IPO, which allows the company to avoid pitfalls, which Google and Morningstar have already confronted.
At this point, it is important to dwell upon advantages of each type of IPO to define the most effective one for Twitter. First of all, it is worth mentioning the plain vanilla IPO, which is undertaken by a privately held company, mostly owned by management, who want to secure additional funding and determine the company’s fair market value (Viardot, 2001). This type of IPO is beneficial for companies, which attempt to preserve the control over their capital and attract a few serious investors, who can enhance their position in the market. Therefore, this type of IPO allows avoiding the involvement of unreliable or undesirable investors.
Second, a venture capital-backed IPO refers to a company in which management has sold its shares to one or more groups of private investors in return for funding and advice (Viardot, 2001). This strategy provides companies with additional funds and helps them to overcome current financial difficulties or to improve their financial performance and expand their market share. In fact, this strategy is applied when companies need one or a few large investors and they are ready to sell out to investors for the sake of funds and advice. As a rule, this type of IPO is applied, when companies are in an uncertain or poor financial position and need substantial funds.
In a reverse-leveraged buyout, the proceeds of the IPO are used to pay off the debt accumulated when a company was privatized after a previous listing on an exchange (Viardot, 2001). This process allows owners of the majority of shares to buy out their firms, which are undervalued in the market, thus meeting their financial goals and improving the position of their companies. In fact, this approach is the best for companies which have almost run bankrupt and they need investments to avoid bankruptcy and recover fast from their financial problems. In such a situation, investors are not just reasonable buyers of the company but rather investors, who are ready to change the company or use its brand for their own purposes to make it profitable again.
A spin-off IPO denotes the process whereby a large company carves out a stand-alone subsidiary and sells it to the public. A spin-off may also offer owners of the parent firm and hedge funds the opportunity to capitalize mispricing in both the subsidiary and parent if the market is not efficient enough (Viardot, 2001). Basically, this approach allows companies to raise funds and preserve the full control over their performance, whereas investors can only focus on the subsidiary but have little impact on the parent company. Obviously, this type of IPO is beneficial for companies, which have a strong position in the market and need funds to accelerate their development and expand their market share fast. In fact, the spin-off IPO is the most beneficial and effective for Twitter because the company holds a solid position in the market and attracts a number of investors ready to invest their money into Twitter. For instance, Twitter can create a subsidiary, such as Twitter Adds, which can focus on advertising entirely and Twitter Adds can have exclusive rights to place and spread ads within or via Twitter. In such a way, Twitter will preserve its position as an independent company but, on the other hand, the company is likely to rise substantial funds from the part of advertisers and other companies interested in advertising in Twitter.
However, Twitter should take into consideration costs and risks of each type of IPO. The plain vanilla IPO does not need substantial funds but there is a risk of losing the independence of the company and losing control over the company. A venture capital-backed IPO is effective and does not need substantial funds but the company should come prepared to losing its independence and consistent increase of the impact of the major investors. The similar risks can be traced in case of a reversed-leverage layout but, in this case, the company is likely to lose control over its performance and total sell out to its investors. Finally, a spin-off IPO is probably the most costly because it needs the investments in the creation and development of a subsidiary but revenues and benefits from this type of IPO outweigh costs, especially in case of Twitter.
Thus, Twitter should pay a lot of attention to the choice of the type of IPO. In this regard, the company should choose the spin-off IPO because, at the moment, Twitter is a successful company, which has just started its business, whereas its potential is huge. Therefore, the company should choose the best options for taking advantage of its position and preserving control over its performance. Obviously, the spin-off approach may be costly but still Twitter can benefit from advantages of this approach. At any rate, the company has a substantial potential for the further growth.