Tweeting in a New Era: Twitter’s IPO

What was once a simple picture of a bird is now a globally recognized symbol for a billion dollar company.

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 busiensses 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 have delusions of grandeur and think that they will be able to achieve such immense wealth-which, realistically, rarely happens to most businesses.

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 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.

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 Stop and Shop 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.

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.

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.

Published in: on November 12, 2013 at 5:37 am Comments (1)
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SAC Scandal

Just to match a face with a name, this is Steven A Cohen, the subject of much of SEC's scrutiny as of late. Read on to find out exactly what he allegedly did.

Just to match a face with a name, this is Steven A Cohen, the subject of much of the SEC’s scrutiny as of late. Read on to find out exactly what he allegedly did.

An important piece of news in the financial world has involved SAC Capital: SAC is being pursued by the SEC on insider trading for $1.2 billion, and the head of SAC, Steven A Cohen, is facing a civil lawsuit for failing to supervise his employees, which could ultimately lead to him being legally forbidden from working in finance ever again, not to mention facing potentially hefty fines and jail time.

Sound complicated? It is. The news has been covering the story for quite some time, so it is rather difficult to understand a random article about the latest development if you have not been following the story from the beginning. My goal is to enlighten you about this important current event so that you will be able to have an opinion on the matter should someone ask you about it, or if you just want to be well-informed. (In my attempts to make this piece informative, accurate, and interesting, I conducted some research regarding the information I will be discussing. While I will not write a works cited page, I do not want to plagiarize. Therefore, I note here that the origin of many important details is Wikipedia.com. Thank you very much, and please continue to provide your services to your large following of students who procrastinate.)

A hedgefund is comprised of many different types of companies, from its finances  to the types of goods and services offered.

A hedge fund is comprised of many different types of companies, from its finances to the types of goods and services offered.

Steven A Cohen founded SAC Capital, a hedge fund, in 1992. (If you cannot tell, the etymology of the company name is his initials, a humble gesture on his part, I’m sure.) A hedge fund is a “pooled investment vehicle.” What does this mean? Two words: making money. People who want to invest buy shares in a company in order to make more money. Putting all your cash in one place, however, is risky. What if the company declares bankruptcy? Then you lose everything! The key to investing wisely is by diversifying. Just like the Queens College students are diverse, so too your investments should show variety. A hedge fund enables you to invest your money in a plethora of companies (that are either different types or have different ways of raising capital), so that the risk of losing money is slim.

Let's just say Steven A Cohen is a tad higher than most of us on the Forbes Top 400 List. Slash he is actually on the list, which speaks volumes about the amount he holds in his bank. account.

Let’s just say Steven A Cohen is a tad higher than most of us on the Forbes Top 400 list. Slash he is actually on the list, which speaks volumes about the amount he holds in his bank account.

So what’s wrong with starting a company that wants to make more money? This is capitalist America, after all! SAC is a relatively young company at 21 years old. In this short amount of time, SAC has grown substantially, to the point where it is now worth $9.3 billion. That is an astronomical value; it is not surprising, then, that Cohen is #43 on the Forbes 400 list of the wealthiest people in America. On the surface, this does not seem to be a problem. Perhaps Cohen has a knack for detecting companies that are valuable, and consequently invested in those. Yet others are more cynical. For example, the SEC, essentially a police force exclusively dedicated to keeping the finance aspect of the business world in check, thinks that something is fishy as to how SAC conducted their investments. Being able to amass such an incredible amount of wealth in such a short time frame is perhaps too good to be true. (Note: do not mix up the SEC and SAC- the former is the prosecutor, and the latter is being prosecuted.)

In 2004, Martha Stewart was famously charged with obstruction of justice and was sentenced to jail. While not explicitly convicted of insider trading, she essentially did so. (Her decision to suddenly sell stocks whose value subsequently plummeted, in addition to other evidence, indicated that she had acted on information that the laymen did not know.

In 2004, Martha Stewart was famously charged with obstruction of justice and was sentenced to jail. While not explicitly convicted of insider trading, she essentially did so. (Her decision to suddenly sell stocks whose value subsequently plummeted, in addition to other evidence, indicated that she had acted on information that the laymen did not know). I personally find it rather shameless that she used this opportunity in the limelight to highlight her crocheting skills; the crocheted poncho immediately became a fashion fad.

It is important to note that the SEC does not go after lucrative companies (or it is not supposed to) unless they do something illegal. In the case with SAC, the SEC has found evidence of insider trading. (It is not alleged because 6 employees have already pleaded guilty to doing so.) Insider trading means having information that others are not privy to, and consequently acting upon this knowledge. That way, you can invest in something that is currently low in price and that you will reap the monetary benefits when it increases in value; similarly, if you know stocks will decrease in price, you will sell them while they are still valued highly. In short, insider trading is illegal because it is unfair. Despite the dog eat dog nature of business, America tries its best to regulate this unfair type of business behavior.

The insider trading in this case involves a doctor who told SAC investors about a trial for a drug that did not have terrific results. Knowing this information, one would automatically want to sell their shares in the company because it is not doing so well. However, only SAC knew of the unsuccessful results of the trial, and consequently were the only ones to sell their shares in the company, while it was still valued highly. By selling at the perfect time, they avoided losses of $276 million.

The ultimate goal is to catch the top person who orchestrated the insider trading. In building its case, the SEC has slowly been interrogating, and often indicting, different employees of higher and higher ranks, figuring that someone will finally spill the beans and disclose information that proves that Cohen is guilty. The workers,however, have all remained mum on the subject. Cohen has remained adamant in his claim that his employees were the ones who, out of their own volition, acted unethically. By agreeing to pay the SEC about $600 million, he did not admit to being guilty; rather, he wanted to put an end to the SEC’s continuously pursuing the company. After all, knowing that the SEC is determined to bring about your downfall is both extremely burdensome and bad for business.

The SEC theorizes that there is a web of unethical insider trading, all stemming back to Steven A Cohen. It has been desperately trying to find a solid connection back to him in order to piece the puzzle together.

The SEC theorizes that there is a web of unethical insider trading, all stemming back to Steven A Cohen. It has been desperately trying to find a solid connection back to him in order to piece the puzzle together.

The reason the SEC is so adamant to achieve this win against the SAC is because of what happened in the Financial Crash of 2007. In going after large businesses, it is trying to prevent such a widespread economic travesty from happening again. Should SAC concede defeat, SEC would achieve its largest win, in terms of how much the company would be fined: in total, over $1.8 billion. Sometimes, however, it seems that the SEC simply has a vendetta against the success of large businesses. Granted, some arrogant businesses still believe in the mantra that flew around during 2007 of being “too big too fail”; nonetheless, they are well within their rights to try to expand their success. Whatever ultimately happens, this is an important current event to be aware of because it is sure to have many legal and financial consequences as to how businesses will conduct themselves in the future.

Update: Literally as I was putting the finishing touches on this post, I checked NYTimes.com and saw breaking news: “SAC to Plead Guilty and Pay $1.2 Billion for Insider Trading.” While at first I was upset that this happened before I posted, I saw a silver lining for my readers. After reading this piece, you will have a thorough background of the story, and will be able to follow the ensuing legal drama that will take place.

Published in: on November 5, 2013 at 4:15 am Comments (0)
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Me in the Finance World: An Observation after Seeing it Live for Myself

What comes up on a map image when one Googles "banks in Manhattan". Manhattan is densely populated with a variety of financial institutions and I was therefore overwelmed, having no clue as to where to start my search for a potential interviewee who both fit the bill and had time to see me.

What comes up on a map image when one Googles “banks in Manhattan”. Manhattan is densely populated with a variety of financial institutions and I was therefore overwhelmed, having no clue as to where to start my search for a potential interviewee who both fit the bill and had time to see me.

In one of my classes for my minor of BALA (Business and Liberal Arts), we are required to conduct an interview with a person in a position that we aspire to hold. The project entails much more than simply interviewing and it is a major to-do. I was stressed, not about the five page reflective essay about what I gleaned from the experience, but at the prospect of finding someone who would be willing to be interviewed by me, an unimpressive sophomore from a CUNY school; after all, people in this field are stereotypically arrogant. Many hours of Google research later, I sent out email requests to a multitude of people in finance related positions who worked in NYC (which, as you can imagine, is a lot. Finding their names was the easy part; tracking down their emails and contact information, on the other hand, was a nightmare.) After much waiting, I eventually received a reply from two individuals at vastly different institutions that for privacy purposes I will from here on out refer to as X and Y. X is a prestigious financial firm located amidst other wealthy institutions. Y is at a less central address and is a not-for-profit (exactly what it sounds like-they do not make a profit. A profit is the amount left over after you subtract expenses from revenue.)

While the assignment required one interview, I decided to conduct an interview with both people since they would each provide unique insights. In addition to being exhausted by the end of the week from commuting from Queens to Manhattan and back two days in a row after my classes, I came out being more informed about the diverse nature that exists in the finance world.

I know it's not professional, but I could not resist taking a selfie before my interview with X. In my defense, I almost never take such painfully narcissitic photographs. Also, I thought that it would give this blog a personal touch. Dressed to the nines, I was both excited and nervous for this special opportunity.

I know it’s not professional, but I could not resist taking a selfie before my interview with X. In my defense, I almost never take such painfully narcissistic photographs. Also, I thought that it would give this blog a personal touch. Dressed to the nines, I was both excited and nervous for this special opportunity.

Coming to X, I was extremely nervous. While I do not wish to publicly say what company it was, I will say that it was a renowned institution with someone whose professional opinion is often sought by the media. I was told to dress smartly, and that I did: I donned a sweater shirt and black pencil skirt (both from Banana Republic, together costing no more than $20), a classic blazer (it was rather pricy, but I have worn it so many times that it was a worthwhile investment) and of course a pair of fancy heels. I thought I looked like a million bucks! When I looked around, I was both relieved and surprised that I fit right in. Everyone else was wearing essentially identical suits, each with a unique silk tie as a minute reflection of his personality.

I say this because for the most part, there were only men walking in and out of the building. I was appalled. For all that is done to prevent a certain field from being dominated by one gender, the ratio I calculated of women to men was around 1:8.  Whenever I read the business section of the newspaper, the person discussed is almost always a male. I nonetheless had a glimmer of hope when I came to the building that the reality would be the opposite- that women would have an equally important role.  Instead, as the revolving door turned, more and more men walked in and out, preparing for a meeting or taking a quick smoking break.

The amount of smokers around the building was astronomical. All the current attempts to rid smoking from society are surely negated by the incessant puffing I witnessed.  The instant they left the building, they lit up their cigarettes. While I understand the unfortunate reality that some smokers are so addicted that they physically cannot stop, I find it rather ironic that financial advisors who help clients save and earn money are wasting their own on something that is so detrimental to their health.

Those who were not smoking were frantically checking their phones. At first I thought maybe they were playing an intense game of Candy Crush, but I later realized that many of them were still attending to business matters. As I soon learned from my interview, in prestigious financial institutions, one is always on the job.

The best way to depict the way opportunity costs work is through PPF's-production possibility frontiers. The Y axis represents the quantity of one good, the X axis represents the quantity of another good. I won't get into the nitty-gritty, but here is the basic thing to note: Whether on a linear graph or a curved graph, as Y gets smaller, X gets bigger (called an inverse relationship). If you think about it without looking at the graph, it makes sense: as you have less of one thing, you can have more of another. While we often apply this concept to tangible goods, you can apply it here, too: the more work you have, the less leisure time you have. The curved graph is special because it shows a relationship where the more you increase one good, you exponentially lose more of another. For example: in a linear graph, every additional hour you spend at work means losing exactly one hour with your family. In a curved graph, one hour of work means one less hour with the family; another hour of the former means two hours less of the latter.

The best way to depict the way opportunity costs work is through PPF’s-production possibility frontiers. The Y axis represents the quantity of one good, the X axis represents the quantity of another good. I won’t get into the nitty-gritty, but here is the basic thing to note: Whether on a linear graph or a curved graph, as Y gets smaller, X gets bigger (called an inverse relationship). If you think about it without looking at the graph, it makes sense: as you have less of one thing, you can have more of another. While we often apply this concept to tangible goods, you can apply it here, too: the more work you have, the less leisure time you have. The curved graph is special because it shows a relationship where the more you increase one good, you exponentially lose more of another. For example: in a linear graph, every additional hour you spend at work means losing exactly one hour with your family. In a curved graph, one hour of work means one less hour with the family; another hour of the former means two hours less of the latter.

Work at one of these high ranking financial firms entails a tremendous amount of diligence and drive. It is a high pressure environment, and unless you are truly passionate about your work and motivated to work yourself to the bone, you will not succeed. It is a cutthroat environment that is not meant for the weak of heart. If you do not put in 110%, someone else will put in 115% and beat you; the finance field thus functions as a microcosm for a dog eat dog world.  The financial benefits are incredible, but receiving them ultimately comes at a price. In economics, we call this an opportunity cost– what will you give up in order to receive something else. When working in this pressurized work environment, you may get a terrific paycheck, but at a cost of not spending any time with your loved ones. Sacrifice and compromising your personal life is inherently part of this  type of work. The person I interviewed, through his personal experiences and opinions, truly shed light on the significant highlights and lowlights that exist for those who work in the top firms.

For this interview, I donned a more casual outfit that showed a bit of creativity, instead of a boring black suit . The outfit fit the personality of the company to a T. As you can see from this selfie (I swear, my last one ever!) I was noticeably less nervous for this interview because the atmosphere was significantly less tense. Nonetheless, both were interviews were at institutions that were prestigious in their own right, and I learned a tremendous amount from both.

For this interview, I donned a more casual outfit that showed a bit of creativity, instead of a boring black suit. The outfit fit the personality of the company to a T. As you can see from this selfie (I swear, my last one ever!) I was noticeably less nervous for this interview because the atmosphere was significantly less tense. Nonetheless, both interviews were at institutions that were prestigious in their own right, and I learned a tremendous amount from both.

What I witnessed at Y, the not-for-profit, was so different than X that I had to stifle a laugh. The ambience in the office space of this company was extremely modern and casual. Unlike the sterile, serious environment in X, Y was filled with bright colors in addition to workers who all clearly had their own unique identity; no one was wearing formal business attire, but rather garb that was interesting and creative. To call this area an office space is almost a misnomer because such a word connotes serious, silent working. Here, employees were indeed working, but in a setting that did not feel nearly as tense as in X. The people were friendly, an important quality considering the importance of teamwork for many tasks in Y; in X, independence and getting the job done on one’s own was of the utmost importance. Overall, the mood was not nearly as stressful as that in X. Y was also an important company with goals to achieve and deadlines to meet, but it employed a vastly different corporate culture than that of X.

My original goal was just to glean insights about the finance world from one interview. But by conducting not one, but two interviews at institutions that are polar opposites, I thoroughly achieved the mission of this project. People may attribute certain stereotypes to the finance field, but in reality, it is extremely broad. It is possible to work in a cutthroat environment where all of the work must be done on your own. Long hours and no fun, in the end, are justified by two types of people: those who are genuinely passionate about finance, and those who value rewarding paychecks above everything else (I interviewed the former type, which made for a terrific experience). On the other hand, it is possible to be involved with finance while still having a relatively stress-free time. It might entail a smaller paycheck, but peace of mind for many outweighs the debilitating stress that can come with huge companies. A place like Y also allows for learning and training-the person who I interviewed had majored in political science and communications (so she had no formal education in business). In X , however, you are thrown into the water and must fend for yourself. It is therefore crucial to know yourself and your limits. When you think of people who work in this field, know that in fact a broad range of people can work in finance.

 

Published in: on October 13, 2013 at 8:06 am Comments (1)
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