Module 1 Case Assignment
Dr. S. Wesley
February 20, 2014
For the purpose of this first module's case assignment students were assigned the task of reading various articles from the background in order to learn about the differences between traditional Initial Public Offerings and alternative online auctions such as the Dutch auction.
After getting some insight about how the traditional IPO processes work verses using the alternative online process I will look at the company AVG and describe in detail which IPO process it would most benefit from.
I will explain my reasons for this decision by focusing on the type of investors I believe they will likely attract as well as discuss the costs and the risks associated with each. I will also list various advantages of each IPO process and will then conclude by reaffirming my decision to advise AVG to go with the IPO process that I believe will best benefit their company. Body
Based on the research I have conducted concerning the use of both the traditional and the online auction IPO processes and given AVG's global online audience and its untraditional business model I would highly recommend that the executives at AVG use a traditional IPO to bring their stock public and will list the reasons for my decision in the following paragraphs.
Lets begin by taking a quick look at the differences of each IPO. Investment Bankers use a book building process and make their money by charging large fees and commissions to take the issue on a "Road Show" to large institutional and sophisticated investors to determine an appropriate IPO price and in return these selected investors often receive the initial allotments of IPO shares and therefore benefit from the price appreciation imbued between the offer price and the open price. (Fung, 2011).
While, the Dutch auction is designed for the seller to get the best price. It enables more investors to participate in the pricing by posting the price they are willing to pay and the number of shares they are willing to buy and as a result the final price of the IPO winds up being the lowest price at which all shares are sold. This process minimizes the Investment banker as the middleman and therefore the fees are significantly less. (Hansel, 2005) The downside is that online auctions don't have bankers out there actively marketing the offer. Lessons Learned
Lessons learned from the article entitled "Morningstar follows Google's lead" written by (Carter, 2005) described the reasons companies choose alternative routes instead of the traditional paths. In short, after reading Carter's article it became rather clear that the online auction process seemed to be more successful for larger well know companies like Google and that the alternative online auctions didn't seem to be as successful for a smaller lesser known companies like Morningstar.
The article went on to explain how firms using online processes are not subjected to the same rigorous interviews of the investment banks like in the traditional book building process and that Morningstar actually went public when it was under legal investigation relating to inaccurate data Morningstar published on a mutual fund. (Carter, 2005). Google also encountered regulatory and market challenges during the IPO process. Specific missteps, such as the failure to register employee share distributions with the SEC. Maybe if they had used the traditional process they might have been able to avoid some of these problems in advance. In a different article entitled "Lessons learned from Google's Dutch auction" it stated that an advantage to the Dutch auction process is an efficient pricing mechanism, but Google was launched in a rather cold market and didn't get as much money as it expected to. Instead Google offered its issue at $85.00 and the stock rose to $100.34 in the aftermarket and Morningstar offered at...
References: Carter, A. (2005). Morningstar follows Google 's lead. Retrieved May 2012 from http://www.businessweek.com/bwdaily/dnflash/jan2005/nf20050110_8372_d b035.htm
Davidoff , S. (2011, MAY 27). Why IPO’s get underpriced. New York Times. Retrieved
Hensel, N. (2009). An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes. International Journal of Managerial Finance, 5(3), 268-310. doi:http://dx.doi.org/10.1108/17439130910969729
IPO fees. (2011). FT.Com, Retrieved from
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