IPO for AVG? An Initial Public Offering

¶ … IPO for AVG?

An Initial Public Offering (IPO) is described as the first sale of stock by a company that seeks for further growth. IPO is commonly used by such companies in order to generate necessary capital for expansion. AVG is an example of a company looking for further growth through an initial public offering since the firm is uniquely positioned to lead innovation in the industry. While the company announced filing for proposed initial public offering in 2012, the main concern is whether to use the traditional IPO approach or an untraditional one. It's still unclear which approach AVG will use because of its global online audience and untraditional business model. Even though the traditional IPO approach has commonly been used in the past, the untraditional method or online auction was a process that emerged through Google and Morningstar initial public offerings. The determination of the most appropriate IPO process for AVG requires an analysis of each of these approaches based on their advantages, costs, risks, types of investors they attract, and lessons learned from every process.

Traditional IPO vs. An Online Auction:

The traditional IPO process involves the company's recruitment of an investment bank to underwrite the IPO. Since the investment bank and company carry out research on the probable market value of the firm, they determine the number of shares to be offered and the price of each share depending on their findings and the capital to be generated in the IPO ("Traditional IPO vs. Auction-Based IPO," n.d.). This is followed by a road show for presentation of the offering to large investors such as wealthy individuals and institutional investors. During this process, interested individuals commit to purchase certain number of shares at the stated price. The completion of the road show is followed by analysis of the commitments and allocation of shares where investors are not necessarily allocated the shares they are interested in buying. This is followed by collection of a sales commission and other fees incurred to underwrite the IPO by the investment bank. Once this is complete, the investors begin trading on the stock on the first day of trading.

An auction-based IPO is different from the traditional approach since it involves the use of the Internet to start the purchase of IPO stock to a huge group of potential investors. While companies seeking to go public still need an investment bank in order to underwrite the IPO, the costs are substantially lower than the traditional IPO. In this process, companies not only determine the reserve price but they also determine the number of shares they are offering. Auction-based IPO still use a road show to educate large investors but no allocation of shares is carried out. However, when the bidding process starts, investors propose a bid for the price and shares they want to purchase. Notably, the company sets the price of a share significantly above what investors are likely to bid and decreases the price gradually after bidding starts. After a bidder is sold the shares he/she wants to buy, the price is further lowered incrementally, a process that continues until all shares are sold.

Best Approach for AVG's IPO:

AVG applied to list its ordinary shares in the New York Stock Exchange through an initial public offering that will consist of the firm's ordinary shares and those to be sold by some selling shareholders. The selling shareholders are expected to provide the underwriters an option to buy extra ordinary shares to cover additional allotments ("AVG Technologies Announces Filing," 2012). While the company will not receive any proceeds from the sale of the ordinary shares, the IPO will generate capital for general corporate purposes including future acquisitions.

Since AVG has a global online audience and an unconventional business model, an online auction or auction-based IPO is the most appropriate process for the company. This is primarily because an auction-based IPO has more advantages than the traditional approach. One of the major advantages of an online auction is that it increases the scope and type of investors that the company is likely to attract. The traditional IPO process basically targets large institutional investors and wealthy individuals who are usually lucrative customers of the underwriting investment bank. Together with these investors, the large investment banks control the allocation of the lucrative IPO shares in a traditional IPO.

On the contrary, the online auction process will enable AVG to enhance the ability for small investors to engage in the IPO process while lessening the conventional dominance of larger institutional investors and the underwriting investment bank. Similar to the Google online auction IPO, this model is likely to provide publicity for AVG, which is likely to generate the interest of small investors and other individuals who are usually less involved in an IPO (Hensel, 2005). The ability to generate publicity and attract small investors is attributed to the fact that AVG already has a global online audience and possibility of a well-known IPO.

Secondly, the online auction process is suitable for the company because it enables the reduction of the increase between the offer price and open price of an IPO. While this was not achieved in Google's IPO, it is achievable in AVG's IPO since management and venture capital companies in Google's case benefited from the eventual high valuation placed on the firm's stocks by the markets. AVG is likely to generate more profits through an online auction process because the share price is likely to end with a share price that is close to market value though the first-day increase is usually less when open trading begins.

The other reason for suitability of an online auction over traditional approach for AVG IPO is the costs associated with each type of public offering. According to reports from many investors, traditional IPO seems to be very costly and inefficient to an extent that it places the ultimate investors and issuer at a disadvantage. Generally, the present spread to underwriters in a traditional IPO in the United States is approximately 7% of the issuing value while that of an online IPO process is nearly 4%. Apart from the underwriter fees, a company incurs around $3.7 million in direct costs of financing the traditional IPO including road show expenses, legal fees, accounting costs, and printing fees. While the total issue costs vs. The aftermarket price in a traditional IPO is averagely 28.04% whereas the online IPO priced cost is 8.17%.

Therefore, the traditional IPO seems to be a very costly approach for AVG as compared to the online auction IPO. However, AVG will need to lessen risks associated with an online auction such as mispricing, substantially less-than-expected capital, and reduced price range. In contrast, the traditional IPO is associated with risks like limiting potential investors, complexity in preparing for the process, corruption, and low public confidence. While the traditional IPO contributes to generation of more capital than the online auction, it's very difficult for a company to minimize the risks associated with it. As evident in the Google online IPO process, AVG is likely to benefit from the advantages of accurate price discovery and equal access to shares for each potential investor. Unlike the traditional approach, the new IPO process will ensure that the offering's full value goes to the company instead of the investment bank's favored clients.