In 2012, Facebook overestimated its IPO price and led to little expected trades on its first day. In 2013, Twitter attempted to avoid Facebook’s mistake, and in result, Twitter underestimated its IPO price and led to the loss of a potential billionaire revenue. A gain from Twitter’s IPO trade is indeed existent. The question is, who is benefiting from the underpriced trades? This argument is discussed in New Yorker’s article, “Who Gained From Twitter’s Underpriced I.P.O.?”
The act of underpricing IPO’s seem like a trend for the last few years. The rise of newly public company shares, on the day of their IPO’s, was calculated at thirteen percent in 2011, eighteen in 2012; and this year in 2013, it is sitting at twenty-one percent. Although the author of “Who Gained From Twitter’s Underpriced I.P.O.?” does not directly state that Twitter’s IPO underwriters have intentionally underestimated the value of Twitter , the author comments on the fact that those bankers actually gain through two forms – IPO profit commission and also, in the “form of happy clients” where clients that have gained from underpriced IPO’s return to the same bankers for more future investments. Whether IPO underwriters underpriced newly public companies unintentionally or not, the underwriters still gain from two revenue streams.
As mentioned earlier, there is a “billion-dollar gaps amount to more than the cumulative sun of all the revenue [Twitter] has ever earned”. Instead of Twitter selling its seventy millionaire shares at forty-five dollars apiece, it was sold at for twenty-five dollars instead. The company could have used the additional profit to invest in its business, and now, the benefit is in the hands of investors. The gain from Twitter’s IPO still exists, but the profit is circulated in the market of funds and banks; which undoubtedly, is improving the economy. However, if the gain was in the hands of Twitter, the economy also could have been improved as Twitter is an innovative and fast-growing company. The author of “Who Gained From Twitter’s Underpriced I.P.O.?” believes a dollar spent by the company would have been economically more efficient than a dollar invested in funds and banks. I personally support the argument of the author.
Indeed Twitter has successfully avoided Facebook’s mistake of overpricing its IPO, but Twitter dove too far in the opposite direction by underpricing its IPO. Twitter has gained profit from its newly public shares, yet the profit could have been significantly higher. The gain of profit still exists and the money is now circulating in the hands of investors. Has Twitter gained? Has investors and bankers gained more than Twitter? Yes, and yes.
“Who Gained From Twitter’s Underpriced I.P.O.?”
http://www.newyorker.com/online/blogs/currency/2013/11/who-gained-from-twitters-underpriced-ipo.html