William M. Grissett
November 21, 2012
Module 1 Case Assignment
Dr. V. Vallillee
What type of IPO should AVG use - a traditional IPO or an online auction? Based on your analysis and findings, what would you recommend to the executives of AVG? Based on research I believe that AVG should utilize the online or Dutch auction, where investors bid on an initial public offering before it goes public. The benefits are clear. In theory, a fair market price is set and the company reaps more cash. It is evident that AVG should take stock of the lessons learned and best practices now known from the less than spectacular Google Initial Public Offering. In traditional IPOs, prices are set low to ensure a big first day run for investment banks and their clients and being that AVG is a rather small company with a limited investor base utilizing this approach would seem to be counter intuitive. The possibility would exist with a high probability that offering goals may not be reached or sustained for any length of time post IPO.
To answer the above question, please include responses to the following issues together with other issues that you think are important: ●The type of investors AVG is likely to attract
●The lessons learned from Google and Morningstar from their auction IPOs Don’t be afraid to try something new, the old or traditional means may not be the best way Don’t IPO to soon
Be transparent during the process; make sure not to hide data that indicates less than optimal outlook or performance. The online auction process is full of advantages and disadvantages from the perspective of the issuing company. On the one hand, it increases the ability of small investors to participate in the IPO process, and minimizes the traditional dominance of larger institutional investors who were lucrative clients of the underwriting investment bank. On the other hand, small investors may lack the ability to efficiently price an IPO due to lack of information. This information gap could arise because small investors lack access to the sources that institutional investors have, or because companies are not required to provide detailed information in the online process. Furthermore, investors could discount an IPO issued through the auction process by perceiving it to be a company that may not have a clear sense of the uses for the funds that it is raising, or that may have done poorly using the traditional IPO issuance processes. Although the online auction process certainly provided publicity for Google's IPO, which may have stimulated the interest of small investors and others who are normally less involved in the process, it is unlikely that it would have generated this benefit for a less well-known IPO. One of the principal advantages of the online auction process is supposed to be that the increase between the offer price and the open price of an IPO is minimized, providing the issuer with greater value. Although this did not occur in the case of Google, the management and venture capital firms did benefit from the ultimate high valuation that the markets placed on Google stock. It is unclear if a less well-known company, once it experienced underpricing relative to its true value, would enjoy the price spiral that Google achieved. On the other hand, the traditional process leaves much to be desired. With the recent Spitzer probes into a variety of extensive and common business practices ranging from "bid rigging" in the insurance industry to market timing and late trading in the mutual fund industry, the confidence of the public in traditional processes may be at a low ebb. Many of the informational problems inherent in the online process can be overcome by issuing firms if they are willing to provide detailed information to investors. Managers of issuing companies should be explicit about: (1) the uses for the capital that they are raising; (2) the transparency of their corporate governance structures...