Trident University International
Module 1 Case Assignment
FIN501: Strategic Corporate Finance
Dr. John Halstead
August 9, 2013
AVG Technology: Traditional IPO VS. Auction Based IPO
Our nation has suffered through a recession for the past decade. Small and large businesses, alike, have suffered directly resulting in American jobs being lost, the national debt skyrocketing into the trillions, and parents struggling to keep food on the table for their children. Foresight is a trait that a business owners, or executives, must possess to lead their company in profitable times, and navigate through turbulent times. One of the most significant events in the life of any company is becoming publically traded; when a company “goes public.” AVG Technology recently became a publically traded company, and the way they did that was through a traditional initial public offering (IPO) which was the right decision.
When companies want to go public they must attain an IPO; there are two types of IPOs which are traditional IPOs or a auction based IPOs. The purpose of an IPO is to raise capital which can be used for expansion or enhanced operation (essortment). A traditional IPO is accomplished by hiring an investment bank to write it. In this case the stock price and amount of shares are determined by the company and the investment bank; after the price is determined the company puts on a road show wherein investors are given the opportunity to commit to buy the stock at the predetermined price before it goes public (essortment). The fees of a traditional IPO can be significant, “The investment bank collects a percentage of the IPO sale as commission, in addition to other fees charged to underwrite the IPO. These investors can then start trading the stock on the first open trading day” (essortment).
An auction based IPO is accomplished when a company advertises the shares on the internet to a larger investment pool; the company still has to hire an underwriter, but the fees are greatly reduced (essortment). A Dutch auction format is often used; the company sets the price of the stock well above what they expect investors to pay, then the price is dramatically reduced when the fist investor bids (essortment). In a Dutch auction, a company reveals the maximum amount of shares being sold and sometimes a potential price for those shares. Investors then state the number of shares they want and at what price. Once a minimum clearing price is determined, investors who bid at least that price are awarded shares. If there are more bids than shares available, allotment is on a pro-rata basis–awarding a percent of actual shares available based on the percent bid for–or a maximum basis, which fills the maximum amount of smaller bids by setting an allocation for the largest bids (Weinberg, 2004).
The risk of the auction based IPO is that if the last bidder does not offer enough money per share for the company to raise the capital that they need it makes this whole process moot, and the once profitable company will decline. Not all companies should go public, but if it does it has to meet a minimum standard. First, they have to file a statement and prospectus with the SEC; this provides financial information of the company and basically shows their plan for their IPO (Ibbotson, Sindelar, & Ritter). Second, the SEC reviews their request. During this period the company cannot buy or sell any securities, but they may publish a titled a red herring which is an informational document only (Ibbotson, Sindelar, & Ritter). Lastly, once it is approved by the SEC the company can publically advertise their sale through a tombstone advertisement in newspapers and other publications (Ibbotson, Sindelar, & Ritter). The benefits to a traditional IPO is that a company knows how much capital they will generate, the investment bank will find reliable investors, and overall it is a more stable way for a company to go through...
References: AVG Technology. (2012). PROSPECTUS . Retrieved August 1, 2013, from nasdaq.com:
essortment. (n.d.). Traditional Ipo Vs. Auction-Based Ipo. Retrieved August 1, 2013, from
Ibbotson, Sindelar, & Ritter. (n.d.). From Private to Publicly Traded Firm: The Initial Public Offering.
Retrieved August 1, 2013, from nyu.edu:
August 1, 2013, from ipoplanner.webzel.net: http://ipoplanner.webzel.net/faqs.html
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