Initial public offers to entail the selling of a company’s stock in the market (Padberg, 2007). Occasionally, companies aspiring to expand, such as AVG, conduct IPOs of their stocks in order to increase their financial standing to fund their aspired growth and company operations (U.S. Securities and Exchange Commission, 2007). Such a stock market launch entails a public offering of a company’s shares such that the shares are sold, in a securities exchange market, to the public for the first time. By doing so, other than raising more capital for its expansion, the company is transformed into a public company from the private entity, through monetization of its private investments into an enterprise that is traded publicly. This report provides an analysis of different types of IPOs that AVG would consider as options to utilize in implementing its IPO based on the advantages and risks experienced by other related companies such as Google and Morningstar. A recommendation on the best possible IPO alternative is provided in the conclusion of the analysis.
The type of IPO and investors
The AVG Company is a software development company that provides a wide range of online security, enabling its customers to control their electronic documents in the virtual community. According to a 2013 survey, the company commands over 170 million active users to use AVG products and services in their daily use for the protection and privacy of their electronic data and information (AVG, 2014). Implementing an IPO would provide AVG with a strong financial position to spearhead innovation in the industry. With the IPO to the public, AVG will expand its operations and acquire a wider client base, which would involve individual investors, small and midsized enterprises and multinational corporations. The clientele would benefit from the protection from viruses and malware, which would be improved significantly. In addition, the increase in connectedness foretells the magnitude of expansion that AVG may entail in the implementation of the proposed IPO.
The elevated financial position of the IPO would place AVG in the usage of superior software developers, leading to a better understanding of the client’s needs. In effect, this would culminate in becoming a trusted security software provider to multinational corporations, requiring high-level security for their electronic information in the virtual world. In addition, manufacturing companies of laptops, desktops, and mobile devices would seek the services of the AVG products for online security, as is the case with Microsoft and Google applications. This would be due to the actualization of the dynamic security that AVG would provide its customers on the internet.
Google’s IPO followed the Dutch auction category, whereby investors were allocated shares on the premises of a bid plan. This was as opposed to letting company underwriters allocate their shares to specific corporate institutions as is the case with traditional IPOs. Several lessons can be deduced from the auction IPO type in which the price of shares was established by the lowest bid. The company was able to sell its shares at a relatively high price of between $108 and $135 per share, and a starting IPO price of $85 per share (Edmonston, 2009). This is a positive impact on the auction IPOs, which AVG can adopt for the higher per-share price, and to facilitate in determining the market demand of AVG products. Secondly, publicizing a company that is in the process of conducting an IPO may affect the share prices in auctions. Speculations that followed adversely affected the IPO share prices. Lastly, offering employees with company shares adversely affected the IPO with Google succumbing to SEC fines and buying back the shares. AVG can avoid such fines by averting the issuance of shares to its employees before the onset of the IPO. In fact, the organization should avoid allocating its worker’s shares through mechanisms that would cause an alarm from investors and the public. Thus, the firm should allow its employees to buy the company’s shares through channels that would be used by other investors.
Following Google, Morningstar Inc was able to set better share prices using the auction IPO method. Thus, it shows that AVG’s choice of auction IPO type would result in better prices of its shares (Demos, 2012). It is seen that Morningstar did not want to make comments on the IPO process before the commencement of the IPO process as it was with Google. In this context, learning from previous mistakes led to better prices of Morningstar shares, which AVG requires to follow suit.
Advantages of each type of IPO
One of the major advantages of the traditional IPO is the increased public awareness of the products offered by the company. The road-based advertising that ensues following underwriting into an IPO results in increased publicity of the investing company with its products being known to new potential clients. Secondly, the investing company and the underwriting bank gain more interest from setting a price of the shares lower than what is actually the prevailing market price (Friesen & Swift, 2009).
Lastly, the use of a traditional type of IPO would result in liquidity to the current stockholders, accompanied by future access to capital markets. On the other hand, IPO that adopts the auction approach may involve the application of online resources to attract diverse investors to invest in a firm (U.S. Securities and Exchange Commission, 2007).
The use of the underwriting banks in order to participate in the ordinary traditional IPO is bypassed by the auction method. Therefore, participating in an IPO deems less underwriting cost. Via this method, a company is able to define the number of shares to offer the stock exchange market, including the reserve price for its shares (Khurshed, 2011). Although the involved company may utilize media in advertising for its products and share availability, no shares are required to be allocated by the investing company to big investors. On the contrary, each corporate institution is required to provide a bid price and the number of shares they want to trade (Clinton, 2011). Lastly, the auction-based IPO facilitates investments from many individuals and companies investing in the company offering the IPO.
Costs of each type of IPO
From an analytical angle, the cost of implementing a traditional IPO is relatively higher than that of an auction-based counterpart. First, the cost of meeting the underwriting bank fees, stockbroker’s commission, and advertising expenses culminate in an increased cost of implementing a traditional IPO (Gregoriou, 2006). Considering the auction-based IPO, the investing company does not incur the underwriting expenses and stockbrokers’ commission. Other expenses associated with the US Securities and Exchange Commission are similar in both cases with advertising costs being lower due to online advertisements (Zattoni & Judge, 2012).
Risks associated with each type of IPO
Companies engaging in auction-based IPO are faced with more risks than those using the traditional IPO method. Although there is an increased cost in implementing a traditional IPO, the auction-based IPO may result in lower financial returns than the expected potential of the investing company (Clinton, 2011). In addition, if the customer bids lead to a share price relatively close to the market value, then there is a risk of acquiring substantially fewer investment returns when compared to a scenario where the same company uses the traditional IPO approach.
The use of different IPO types results in different investment potentials of the investing companies. Traditional IPO entails setting up the initial share price of the company’s shares. On the other hand, an auction-based IPO entails providing the public with an opportunity of determining the share prices via bidding and taking the lowest best price. Each IPO type has accrued benefits and risks associated. The traditional IPO type has lower risks, but increased costs and lower share prices. On the other hand, the auction-based IPO is characterized by better share prices and fewer costs in its implementation. From the analysis, the executives of AVG could be advised to engage the auction-based IPO in investing the AVG shares. This is due to the relatively low cost of implementation, and the fact that shares may be priced higher than in the conventional method. Lastly, a critical look at the risks involved and lessons learned from the implementation of the auction-based IPO by related companies such as Google Inc., AVG would be in a position to successfully sell its shares to the public.
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