Initial public offerings

Business -- Corporate Finance -- Initial Public Offerings

AVG is a state-of-the-art IT security company that has been very successful, has aggressively acquired other companies, does business worldwide, and is poised to use an IPO to raise capital. There is a question about whether a traditional IPO or a nontraditional auction-based method would be the better choice for AVG. The pros and cons of traditional vs. nontraditional IPO methods will be considered, including lessons learned from the nontraditional approach used by Google and Morningstar. Finally, the lessons learned by Module 1 will be discussed and evaluated.

AVG Should Use a Traditional IPO Instead of an Online Auction.

AVG is an IT security company for consumers that has taken over a number of other companies since AVG started in 1991 (AVG Technologies, 2013). AVG announced an IPO of 8 million ordinary shares (with 50% from the company and 50% from shareholders) at $16.00 per share beginning on February 2, 2012 on the NYSE (AVG Technologies, 2012). The offering was by prospectus, the book running managers are Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Goldman, Sachs & Co., and the co-managers are Allen & Company LLC, Cowen and Company, LLC and JMP Securities LLC (AVG Technologies, 2012). The SEC declared that AVG's filed Registration Statement is effective (SEC Office of Investor Education and Advocacy, 2013). AVG will probably interest big institutional investors like investment banks and hedge funds because AVG's business is state-of-the-art computing, AVG is very successful and it is expanding worldwide through acquiring other companies. AVG will also interest smaller investors who are paying attention to world markets.

AVG should learn from Google's and Morningstar's experience with online auctions. Google and Morningstar used online auction for the IPOs to obtain investments from millions of very small investors and to avoid the high fees of a traditional IPO. Those high IPO fees are selling concessions of 50-60% of the spread, underwriters' fees of 20-30% of the spread, managers' fees of 10-20% of the spread and, effective May 25, 2013, SEC fees of $17.40/$1 million and SEC assessments on security futures transactions of $0.0042 per round turn (Cody & Traderstatus.com, LLC, 2013). Although Google and Morningstar avoided those traditional IPO problems and costs, they still had to pay the lower fees and costs of an online auction IPO, still had to hire a bank, set of number of shares, set the price per share and pay fees to the SEC (Clinton, 2011). In the long run, Google and Morningstar gave up important benefits of a traditional IPO. By choosing online auctions, Google and Morningstar gave up the favorable media coverage that traditional IPOs typically receive and that would give traditional large investors more confidence about investing in the IPOs (Clinton, 2011). Google and Morningstar also chose more financial risk than the traditional IPO would give them: a traditional IPO is more established and accepted by traditionally large investors like investment banks and wealthy Wall Street investors, so there is less financial risk in the traditional IPO than in an online auction (Carter Chalk, 2005). Also, Google and Morningstar did spread the wealth by attracting many small investors but the amount invested by them was probably less than could be raised by a much smaller number of very large investors such as investment banks and hedge funds (Clinton, 2011). Despite the greater complication, number of people and institutions controlling the IPO and greater fees, traditional IPOs are used because the financial return is worth the trouble. Learning from the experiences of Google and Morningstar, AVG should use the traditional IPO to obtain better press that will increase the confidence of large, traditional investors, incur less financial risk and raise far greater capital from fewer investors.

b. Module 1 Learning Outcomes.

Module 1 is valuable because it teaches the basic concepts and legal requirements of an IPO, the factors considered when a company decides whether or not to use an IPO, and the mechanics of traditional and nontraditional IPOs for the greatest return on investment. In Module 1, I learned the IPO steps: the company files an S-1 Registration Statement that includes a prospectus telling the SEC and possible investors about the company (SEC Office of Investor Education and Advocacy, 2013, p. 1); the documents are reviewed by the SEC for accuracy and obedience to the rules; if something within the documents must be revised, the SEC tells the company to correct the documents; when the documents are correct, the SEC gives an order stating that the Statement is effective; then the company decides between traditional IPO or online auction (SEC Office of Investor Education and Advocacy, 2013). If the company uses the traditional IPO, it uses underwriters who examine the market for "indications of interest" to set the number and price of shares (Clinton, 2011). If the company uses the auction method: it still uses an underwriter but there is no share allocation; the company sets the stock price higher than any bid it expects; potential investors bid for the number of shares and price; bidders keep bidding in increments until they reach a bid that all bidders must pay (Clinton, 2011).

Module 1 also taught us about the success factors considered for an IPO. An IPO decision is based on many success factors. One factor is the risk and expense associated with an IPO: the company must decide whether it can use another alternative, such as a joint venture or a business alliance, which can achieve the same result without all the risks and expenses of an IPO. Even if a company decides to use an IPO, there are a number of factors to consider: the "debt-to-equity" ratio is used by investors to look for a company that is well-funded and that may be refinancing or otherwise lowering its indebtedness before the IPO (Ernst & Young Global Ltd., 2011); the company's individual qualities, such as management, business strategy, brand and position in the market are other factors; timing and the way in which the IPO will be run are other factors. Success factors inside and outside the company all make a difference in the company's decisions of whether to use an IPO, what type of IPO should be used, and how that IPO will be accomplished.