For clarity, an initial public offering is where shares of stock in a company are sold to the general public on a securities exchange, such as the NYSE, for the first time making a private company public.
Most companies use investment banks as underwriters for their IPO. Underwriters help correctly assessing the share price, and establish a public market for the initial sale. Goldman Sachs is the lead underwriter for the Twitter IPO.
When a company lists its securities on a public exchange, the money paid by the investing public for the newly issued shares goes directly to the company as well as to any early private investors who opt to sell all or a portion of their holdings as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital. After the IPO, once shares trade in the open market, investors holding large blocks of shares can either sell those shares piecemeal in the open market, or sell a large block of shares directly to the public at a fixed price.
Although an IPO offers advantages, there are also significant disadvantages particularly with tech companies. Chief among these are the costs associated with the process, and the requirement to disclose certain information that could prove helpful to competitors, or create difficulties with vendors. The process is tedious, grueling and time consuming.
Alternatives to IPO
Facebook’s offering was marred by technical errors that dented the overall market for technology IPOs. Because of this, many tech companies have sought alternatives to the IPO, and they would all be better options for Twitter in my opinion.
The passage of the JOBS Act allows companies with less than $1 billion in revenue to begin the I.P.O. process in secret. It has helped mask the number of companies exploring stock offerings. Why announce now and alert your competitors and the public of your intentions when you don’t have to?
Private Stock Sales
Private stock sales with investing firms and debt financing through banks allows companies all the capital benefits of an IPO without the costs and distractions of the IPO process and the demands of being a public company. Twitter’s supposed ten billion dollar valuation leads me to believe it would have no problems raising capital privately.
Twitter could also sell itself, to say Google, for cash right now while retaining operational autonomy if it were a priority. Valuation, as we know from the Facebook IPO, is an inexact science.
For every successful tech IPO in recent memory such as LinkedIn, there is a Groupon that still trades significantly below its debut price. Growth, competition and flexibility are all temporarily stunted during the IPO process which means tech companies like Twitter whom rely on these attributes should think about not going public or delaying it for as long as possible.