Introduction
Skype is a brand of eBay incl. which was founded in 1995 as internet platforms providers. eBay serves hundreds of millions worldwide providing them with e-commerce and communications services. Skype is software that enables people across the globe to make online conversations (Galante, 2010, p.1). eBay acquired Skype in 2005 and it is now planning to take it public through an initial public offer (IPO). According to Abel (2009, p.1), the Skype IPO is expected to take place by the first half of the year 2010. This was announced by eBay on 14th April 2009. However, this has not taken place until the anticipated period around 2010.
The eBay CEO, John Donahole, The IPO timing will be respective of the company’s market standout. He mentioned that Skype is an independent business and has accelerating growth. He said that Skype is one of eBay’s brands has limited synergy with the other brands; that is PayPal and eBay. The most suitable IPO method for Skype is an online auction IPO instead of a traditional IPO.
An online auction IPO will enable Skype to open the purchase of its shares online and reduce the cost of the entire process. This will be more profitable to the company because it is an internet business. This assignment seeks to justify the method that is suitable to conduct Skype IPO; traditional or online auction IPO. In this case, an online auction IPO is the aptest for Skype IPO.
Traditional IPO vs. Online auction IPO
These two IPO methods differ from each other in some respects despite their ultimate goal of taking a company public. This paper will investigate the features of each of these methods in order to find out why online auction is the most suitable for Skype IPO. Auction-based initial public offer is gradual because it is offering more advantages to both the company and the investors despite it has some risks.
Traditional IPO
In this case, the company floating its stocks to the public will hire underwriters like the investment banks to facilitate the initial public offer (IPO). Both the underwriter and the company obtain the market value of the company and the number of shares the company is going to sell in order to raise the capital required (Lawrence, 2002, P1). The price per share is based on the company’s market value and the capital expected to be raised via the IPO.
The second step is a roadshow that is done to present the offer first to institutional investors. The first chance is also offered to affluent individuals like the investment banks’ customers who are at the top. Then the shares are allocated based on the applicant commitment though no full allocation is allocated. The investment banks get the underwriting fee and a certain commission on the IPO sale (Robinson & Galante, 2010, p1). The stock begins to trade in the market immediately mostly at a very high price compared to the initial price. The disadvantage of this method is that this high initial gain goes to a small group of investors who were able to access the stocks during IPO.
Online auction IPO
In this method, the potential investors buy the stocks through the internet. The purchase is open online. The underwriters; the investment banks are used but with reduced costs. The company comes up with the number of shares to be floated and the price per share. Awareness about the company is done to the investors through roadshows but no allocation of shares is made. Bidding is then started. The investors are expected to bid for the price and the number of shares they wish to purchase in order to help the company get the full information.
According to Lawrence (2002, P1), the format basically used is Dutch auction where the company sets a very high price beyond what an investor would bid. Then the price is lowered to the highest bidder. He is allocated the shares he made a bid on. New bids are made and the process of lowering the share prices is repeated incrementally until all the bidders are sold shares. All the offered shares are sold and the bid price is paid by all the bidders to whom shares are located.
This method has lower fees hence likely to be used by many companies. The end share price is almost the same as the market price and therefore the trading price in the market is likely to be low. This means that the profits are enjoyed by the company but not the investors. The other risk is that the company might not realize the capital required in case its value was overestimated. The method gives many people chances to participate in the IPO. The other risk likely to be encountered is that the return to the investors might be lower than in the case of a traditional IPO.
The lessons learned from Google and Morningstar from their auction IPO
The Morningstar announced its wish to go public on January 7th, 2005. Morningstar, an investment researcher, went public through an auction like the search engine Google. This was meant to give every investor a chance to participate in the IPO. The traditional method of the initial public offer is perceived to be discriminative (Carter, 2005, p1). This is because it gives chances to institutional investors and wealthy individuals but the auction method gives even the small investors a chance.
Auction-based IPO does not have preferential clients. Customers are allocated shares according to their bid. There are other advantages that we learn from morning star and Google Search Company. Firstly, underwrites do not have control over the IPO. This will therefore ensure more profit to the company going public. The investors also get IPO at a low price because the underwriting commission is not factored in. This ensures that they are likely to get huge profits should the price of the shares increase after they trade in the market.
There are no preferential investors and therefore the shares are fairly allocated. It is important to note that Skype customers operate through the internet. The investors likely to be interested or attracted by the IPO are the customers who would easily bid the shares online (Lawrence, 2002, P1). Online auction is therefore suitable. Investors from different classes will also be interested in the Skype IPO and it is therefore imperative to give them chances to participate. Traditional IPO is also expensive because of the cost paid to the underwriters (Abel, 2009, p1). The cost incurred by the online auction is much lower than the traditional method. This method is therefore the aptest for Skype.
Conclusion
The traditional method of IPO is increasingly being replaced by the online auction method. It is not cost-friendly and also denies many investors the chance to participate in IPO. The online auction method is, therefore, suitable for Skype IPO.
Reference List
Abel, J. (2009). Wired.com/epicentre: Skype to IPO early next year-updated. Web.
Carter, A. (2005). Morningstar Follows Google’s Lead. Web.
Lawrence, C. (2002). Essortment.com: traditional ipo vs. Auction-based ipo. Web.
Robinson, E. & Galante, J. (2010). Business week.com: Skype Founders Pondering IPO Don’t Need ’Love’ From Andreessen. Web.