Firms conduct initial public offerings as a strategy to raise the money needed for growth and expansion. Initial public offerings can either involve tradition IPO as well as Auction-based IPOs. In traditional IPOs, companies that aspire to go public engage an investment bank that helps them to underwrite an IPO. The investment bank works together with the firm in researching for the probable market value of the firm.
Depending on the amount of money the firm requires in its growth and expansion, the investment bank and the company determines the value of the share as well as the number of shares the company will offer in order to raise the required capital.
After determining the true market value of the company, the company and the investment banks discounts the estimated market value of the share in order to get the value at which the company will sell its shares. Once the company determines the share price as well as the number of shares to be offered, the firm and the investment bank approaches large investors such as wealthy individuals as well as institutions with the proposed shares.
The institutions and people who are mainly approached by the investment banks are its most royal customers as well as the wealthy group. Subsequently, interested investors commit to purchase some shares at the price given. After the road show process, the investment bank together with the concerned company reviews the investors’ commitments and subsequently allocates them the amount of shares they had pledged to buy.
The investment bank benefits from a certain percentage of the IPO sale as a commission as well as from other fees charged from underwriting the IPO. Consequently, those investors who have been allocated shares start selling their shares on the initial day of trading (Ansoff, 1963).
Auction-based IPOs is an alternative method used by companies in the privatization process. This method entails availing the IPO to a larger set of prospective investors. In this method of IPOs the firm establishes an investment bank that underwrites the IPO at low cost. Firms determine the cost of the shares as well as the amount of shares they will offer.
The road show flows to educate potential investors about the company without allocating the shares. After this stage, the company opens the bidding of the shares and interested investors place their bids as well as the number of shares they are interested in purchasing.
The most common format of auction –based IPO is the Dutch format where the company sets the price above any possible price that any investor is likely to bid for and reduces the price depending on the value of the bids. This process is repeated to other bidders until all the shares have been sold. After selling all the shares, the bidders then pay for their shares at the price that is offered by the final bidder (Weinraub, & Donovan, 2007).
The AVG Company should carefully consider the best strategy to adopt in its privatization process when offering its IPOs (AVG Technology, 2012). The company has two options to consider from; the first one is the tradition IPO method that entails using an investment bank to underwrite as well as allocate shares to potential investors who are mainly the wealthy people as well as institutions that are committed to the investment bank.
The second one is the auction-based IPO that involves availing the shares to a large set of prospective investors by making the allocation of shares open to all interested parties through the bidding process. However, the traditional method of IPOs is not the best strategy for AVG to consider adopting in its privatization process. This is because the option involves high costs to implement.
As a matter of fact, the investment bank that the company employs to underwrite and allocate shares charges a lot of money in terms of fees paid. Another reason why AVG should not opt for the traditional IPO method is because this method involves allocation of shares to few investors at a discounted rate which makes the investors to attain more shares at a much lower price than the actual market price of the share.
Therefore, during the first trading day, the few investors who are allocated the shares sell them at a much higher price because they are limited to a few investors and were allocated at a discounted price. This makes the investors to make a lot of money at the expense of the company that is offering IPOs in order to raise capital that it requires to expand.
The Auction-based IPOs has a disadvantage of not courting institutional investors through allocation of shares at a discounted rate. This is argued as one of the factor that can negatively affect the future performance of the company that adopts auction-based IPOs as it does not attract enough investors to bring an overall capitalization that is greater than that previously owned by the private entity.
Nevertheless, the buying potential of small scale customers should not be undermined and thus, AVG Company should go ahead and offer the auction-based IPOs despite being cited not to have been a very successful option for the Morningstar.
However, the auction-based IPOs worked very well for Google which because Google had established its brand well before going public. Therefore, AVG Company is likely to succeed like Google if it uses auction-based IPOs option since it has already braded well (Carter, 2005).
For these reasons, the AVG Company should opt for the Action-based IPOs instead of the traditional IPO strategy. One of the reasons why it should opt for the auction-based option is because of the economic benefits is has on the company offering the IPOs. The auction-based IPOs allocate the shares at a price close to the market price.
Thus, the increase of the share price during the first day of trading is minimal meaning that most of the profits end up with the company rather than the investors. In addition, there are fewer costs that are associated with this process which makes it more economical for AVG as compared to the traditional IPO option.
Moreover, the overall costs associated with auction-based IPOs are lower because in action-based IPO, the investment bank just requires minimal fees for underwriting the IPO, but it does not charge extra fees as commissions from the sale of shares as the case with the traditional IPO method that charges a commission that ranges from a ratio of 2.2% to 7% for smaller firms.
Another reason why AVG Company should opt for the auction-based IPO method is because of its ability to express its royalty to all its customers. The auction-based IPO process gives all the stakeholders within the company an opportunity to participate in the bidding process in order to enable them to be allocated shares.
This method will ensure that all the investors who are willing to buy AVG shares place their shares when the firm avails its shares online for bidding. Through this process, many customers will become royal to the company as they will realize that they are highly appreciated and valued by the AVG management regardless of their buying capacity.
This attitude is likely to benefit the AVG Company greatly in the long run as all its customers will continue buying its services as a result of their un-discriminatory aspect of the company (Weinraub, & Donovan, 2007).
Since the AVG Company is considering undertaking an important move of privatization in order to raise the capital, it needs to expand its operations through acquisitions. The company should also ensure that it uses the best strategy to sell its shares in order to raise the required capital and at the same time satisfy all its stakeholders in order to remain competitive even after privatization.
The action-based strategy is the best option that AVG Company should embrace when offering its IPOs as the process entails lesser expenses than the traditional IPO method. In addition, the auction-based strategy gives all interested investors an opportunity to participate in this process which increases customer royalty to the AVG Company.
Reference List
Ansoff, L. (1963). Corporate Strategy. New York: McGraw Hill Publishers.
AVG Technology (2012). AVG technology announces filing for proposed IPOs.. Retrieved from https://www.avg.com/en-ca/homepage#pc
Carter, A. (2005). Morningstar follows Google’s lead. Web.
Weinraub, H. & Donovan, E. (2007). Google and Morningstar IPOs: Incentives for the Dutch auction Process. New York: Prentice Hall.