Initial Public Offering and Book Building
Auctioning Morningstar
1. Describe Morningstar's business. How is the firm performing? Would you be interested in buying shares in the IPO? What steps would you take to make a bid?
The market is extremely competitive.
Advance of information on the internet will give access to information at lowering prices. This will hurt the business model.
2. What are the average first-day returns for IPOs? What explains these returns?
Average first day returns are 13.1% from 1975 to 2004.
17% from 1960 to 2007
Reasons:
Stocks are priced at a discount from the discovered priced through book building / road shows
3. Describe the auction format with Hambrecht and traditional book building with Morgan Stanley. What are the steps in each? What are the benefits and costs of each process?
Auction:
Interested investors (eligible) would submit bid, with the number of shares and the price they were willing to pay.
Sorted by price and number of shares cumulative.
Clearing price was determined – cut off, where the no of shares to be sold would equal the cumulative demand.
Advantages:
Equal access to all bidders: institutional and individuals
Price is determined in the market: fairly
Interest generated from potentially long term investors
Drawbacks:
Might not fulfill demand.
No chance of influencing the price or the demand
Traditional IPO
Valuation of the company
Road show: to get interest mainly from clients of the underwriters – institutional investor
Book Building – discovering the price
Advantages:
Underwriting by banks: they guarantee price and therefore take the risk.
Disadvantages:
Mainly available to institutional investors
High Cost (7% fee)
4. Hambrecht has only managed a handful of initial public offerings. Why hasn't the auction format caught on?
Risk of inflation of price: will big much higher than what you expect to actually pay
Unpredictable variations in the number of bidders
Attracts unsophisticated investors
1. Describe Morningstar's business. How is the firm performing? Would you be interested in buying shares in the IPO? What steps would you take to make a bid?
The market is extremely competitive.
Advance of information on the internet will give access to information at lowering prices. This will hurt the business model.
2. What are the average first-day returns for IPOs? What explains these returns?
Average first day returns are 13.1% from 1975 to 2004.
17% from 1960 to 2007
Reasons:
Stocks are priced at a discount from the discovered priced through book building / road shows
3. Describe the auction format with Hambrecht and traditional book building with Morgan Stanley. What are the steps in each? What are the benefits and costs of each process?
Auction:
Interested investors (eligible) would submit bid, with the number of shares and the price they were willing to pay.
Sorted by price and number of shares cumulative.
Clearing price was determined – cut off, where the no of shares to be sold would equal the cumulative demand.
Advantages:
Equal access to all bidders: institutional and individuals
Price is determined in the market: fairly
Interest generated from potentially long term investors
Drawbacks:
Might not fulfill demand.
No chance of influencing the price or the demand
Traditional IPO
Valuation of the company
Road show: to get interest mainly from clients of the underwriters – institutional investor
Book Building – discovering the price
Advantages:
Underwriting by banks: they guarantee price and therefore take the risk.
Disadvantages:
Mainly available to institutional investors
High Cost (7% fee)
4. Hambrecht has only managed a handful of initial public offerings. Why hasn't the auction format caught on?
Risk of inflation of price: will big much higher than what you expect to actually pay
Unpredictable variations in the number of bidders
Attracts unsophisticated investors