What was once a simple picture of a bird is now a globally recognized symbol for a billion dollar company.
When Twitter announced a few months ago that it would go public, Wall Street and financial investors were abuzz with excitement. Globally, there was also a huge frenzy about this piece of news. What would it be worth? How many stocks would be sold? What would this mean, logistically, for the future of this company, which had hitherto flourished as a privately owned business? After much speculation, Twitter went public on November 7, 2013 with an IPO-initial public offering-of $26 a share.
While 75% of businesses are sole proprietorships, corporations nonetheless comprise a whopping 88% of the revenue earned. Perhaps that is why so many companies strive to become corporations-they think that they will be able to achieve such immense wealth, too. Hate to burst their bubble, but the number of such businesses can just about be counted on your fingers and toes.
To understand why Twitter finally decided to become a corporation, it is first necessary to understand the three types of businesses, and their practical differences. Sole proprietorships are owned by one person; partnerships are owned by two ore more people; corporations are legally distinct entities owned by people who have shares in the company. A main difference between the former two and the latter is in regard to liability. Proprietorships and Partnerships have unlimited liability, whereas corporations have limited liability. Consider a company that you at one point invested $10, but unfortunately now has a debt of $100. As a corporation, the maximum amount you can lose is limited to what you invested; you lose $10 and no more, even though the debt is higher. As a proprietorship or partnership however, there is no cap as to how much you must pay. Even if you invested $10, you are liable to pay off the full $100, no matter the means. Though it might seem cruel, creditors are well within their right to go after your personal assets in order to receive their payment.
It is not as if getting taxed once is bad enough, but corporations get taxed twice! That is sure to make the concept of a corporation much less enticing to the average business owner.
It seems logical, then, that every company should be a corporation. Not so fast! Corporations may not face the scary reality of unlimited liability, but they are faced with something that every individual loathes, but twofold: double taxation. Not only are they required to pay taxes on revenue, but they then must also pay taxes on income. Thus, the downside to unlimited liability is equal to that of double taxation, thereby preventing one business from having more advantages than the other. An additional detail to note is that the official owners of a corporation are the stockholders. As a result, a publicly held company would lose complete control that it would otherwise have as a proprietorship or partnership.
The blue in this map of New York City represents tweeting activity. The tweeting is being done by tourists, friends and family, and businesses.
For quite some time, Twitter succeeded as a privately held company. Yet it determined that it would be able to do even better financially as a corporation. A large demand was evident by the vast amount of people who expressed interest in wanting a piece of the company, figuring that Twitter’s ubiquitous popularity would translate into a valuable investment. In benefitting both parties, a symbiotic relationship through the formation of a corporation would likely result.
What would be the basis for the value of something as amorphous as a website-based company? As Twitter learned early on: advertisements. Twitter facilitated businesses’ abilities of reaching out to new customers. It determined that companies would want to place ads, and it began charging them to do so as a simple way of making a lot of money. Indeed, common folk enjoy using Twitter in order to reach out to friends and family. However, businesses especially reap the benefits it offers by exploiting its ability to reach a large audience. Twitter recognizes how invaluable it is to such companies; it even provides a section devoted to business owners as to how to use the website most efficiently so as to reach out to the maximum number of followers. Thus, by serving the needs of businesses, Twitter ensures that it has users that are willing to pay.
Seeing this in the local Shop Rite reminded me of penny stocks. Penny stocks are shares of small public companies, essentially worth nothing. Of course, if you stock up on thousands of them, the amount you must pay suddenly becomes substantial. On a side note, if you ever encounter such a ludicrous promotion in a store, feel free to laugh and walk away, as others are enticed by the ‘reduced price’. There is a fine line between looking for a sale and being a sucker for a sale.
In the impending days before Twitter went public (an expression meaning that a company becomes a corporation) there was much speculation about the price. People thought that the IPO would be $23-$25, others said $27. The marginal difference of a single dollar may seem petty, but when millions of shares are being sold, these dollars can accumulate. Many felt that for a stock so high in demand, these prices were too conservative. Choosing the right price to start off when selling stocks is critical. If it is too low, the company will not make a lot of money; if it is too high, the company will scare investors away. Determining the ideal price is a complicated science in it of itself, and it requires the Goldilocks principle (not too hot, not too cold, but Just right).
The matter of choosing the right price for a web based company evoked bad memories of the fiasco involving Facebook’s IPO. Facebook overvalued the price of its stock, and for nearly nine consecutive days following its going public, Facebook’s stock price plummeted. An additional problem with its IPO was that there were many technological glitches, causing investors to be unsure if their stock purchases went through (a major cause for concern).
The first day of trading for Facebook was not promising. Notice how much lower the price was at the end of the day, than during the beginning.
Fortunately, Twitter’s IPO ran smoothly. Its initial price of $26 a share fared well with investors. In fact, people were so excited to buy that at the end of the day, prices soared 73% to $44.90 a share. In total, Twitter raised a staggering $2.1 billion in its IPO, making it the 7th largest ever.
The financial implications of Twitter as a corporation are significant. Other privately owned technology companies might note the success of Twitter, Facebook, and even Google, and consequently choose to become corporations. Not only is inundating the market with so many similar businesses a bad idea, but it also might not be in a particular company’s best interest to change its structure. Corporations might hinder its ability to grow, potentially leading to bankruptcy. People who vividly recall the dot com bubble in the early 2000’s, in which people overvalued website based companies, see history repeating itself. While the long-term effects of Twitter’s IPO are unclear, it is obvious that in the short run, similar companies will benefit.
