AVG is a software company, known for its suite of online security products. The company has 106 million customers and a variety of products that it markets to both businesses and consumers. It announced in January, 2012 that it intends to file for an initial public offering, or IPO (AVG, 2012). The company must determine what the best type of IPO is. AVG is planning to float on the New York Stock Exchange In order to determine the best method of floating the IPO, AVG and its underwriters need to take several factors into consideration. Each of the two different types of IPO will have different characteristics that need to be evaluated in order to make an informed decision. In a traditional IPO, the company hires an investment bank. The market value of the company is researched and the number of shares that will be issued is also determined. . The price per share is set, and the investment bank then markets the offering to its clients, or builds a consortium of banks to market the offering. The bank takes a percentage as commission (No author, 2011).

In an auction-based IPO is based on the use of the Internet to find the pool of investors. An investment bank is still needed, but it does less work in this case because it does not perform the marketing function. In addition, the company will often set the price and the number of shares that are issued. The format of the auction is typically a Dutch auction, where the company sets the price higher than what any investor is expected to bid, and then lowers the price until bidding begins.

A traditional IPO is likely to attract the traditional IPO investor. The investment bank will market its products to institutional buyers first, as they are the largest and most important customers. There are then allocations to retail investors through their brokers. However, on a good IPO the bulk of the investors are likely to be institutional. An auction-based IPO is likely to attract a different mix of investor, and these investors may take more of an active role in their investments. They will...

As a result of the investor needed to conduct his or her own research, the auction-based IPO is likely to skew heavily towards institutional investors. However, the average retailer investor can become involved in the auction, which opens the pool of potential investors to a larger group, contributing to a higher price to the issuing company (Slate, 1999).
The high costs associated with the traditional IPO reflect the services provided by the investment bank, and the investment bank is able to funnel lower-priced shares to its best clients. With an auction IPO, the bidding process for the lower-priced shares remains, which in theory should deliver a higher price to the issuing company. In addition, the investment bank takes a lower fee because it is doing less work. Morningstar, for example, opted for an auction IPO because it felt that by giving individual investors more access to the IPO it could a higher price. Individual investors, it felt, were less likely to be concerned about the government investigations of the company that were ongoing on the time (Countryman, 2005).

Weinberg (2004) notes that Google took the same approach, because it also believed that it could get a higher price of its shares using the auction price. Individual investors are particular are less likely to do due diligence on the company, and may also hold the stock for a shorter period of time. They are less concerned, then, with long-term considerations. For Google, the auction process was seen as a means of leveraging the individual investor demand for its shares -- being a highly-visible company it was going attract a lot of individual investor attention -- to increase the value of the issue. It is worth noting that this price inflation is not necessarily considered a good thing, as it represents price movements rooted in lower investor information, not higher (Wilhelm, 2005).

For a large equity issue, the lead firm -- the bookrunner -- takes…