Public Offering One of the Most Common Essay

Excerpt from Essay :

Public Offering

One of the most common challenges that firms will face is taking a company public. This is because the timing must be right and there needs to be clear objectives as to where new investment capital will be utilized. Those firms that are taking these factors into account will have a more successful initial public offering (IPO). In the case of Avaya, the company is considering an IPO in the near future. However, there are challenges in determining what tactics should be utilized to attract the most interest. To decide this requires examining: the type of investors that Avaya is trying to draw, the lesson learned from the Google / Morningstar IPOs, the advantages of each type and the costs / risks. Together, these different elements will provide the greatest insights as to how Avaya should go public.

The type of investors Avaya is likely to attract

The type of investors that Avaya is trying to attract include: aggressive, growth orientated and those that are willing to take larger amounts of risk. At the same, there must be a focus on encouraging long-term and conservative investors to become involved. The reason why aggressive investors are being targeted is they can provide the company with the kind of working capital that it needs (over the short to medium term). The way that this will take place is they can purchase large blocks of stock. This could embolden institutions to begin buying shares (after they see a certain amount of accredited investors becoming involved). Once this happens, is when the IPO could become known as a hot issue. This is when there is strong demand for the IPO and a limited amount of shares on the markets. During the first several days of trading, this can cause prices to increase exponentially (encouraging more investors to purchase the stock). This is important, because it will help Avaya to quickly raise the working capital it needs. ("Hot Issue," 2012) (Megginson, 2008, pp. 469 -- 474) (Klassen, 2011)

While the longer term investors, will establish a loyal following of shareholders that could purchase: secondary offerings, debt, options, warrants and other securities. If this were to happen, the company would be able to raise continuous amounts of working capital. As a result, their basic strategy is to increase the price of the stock (over the short to medium term to attract a variety of investors). This will help Avaya to raise its initial amounts of working capital and to provide additional avenues of financing in the future. (Megginson, 2008, pp. 469 -- 474) (Klassen, 2011)

The lessons learned from Google and Morningstar from their auction IPOs

The biggest lessons that were learned from the Google and Morningstar IPOs, is that an open process can result in a successful offering. The way that this took place, is the two companies did not want to have any kind of favoritism towards specific groups of investors (such as: institutions and wealthy individuals). Instead, they held what was known as a public auction. This is when investors were awarded with specific amounts of shares on a first come - first serve basis. The basic idea behind this process was to give ordinary investors the opportunity to purchases shares. This increased transparency and it encouraged more people to buy both companies because of these factors. (Klassen, 2011) (Carter, 2005) ("Traditional IPOs vs. Auction-Based IPOs," 2011)

For the Wall Street community, this is troubling because most firms will utilize what is known as a traditional IPO. This is when investment banks will help to actively market the offering to their customers. When this takes place, it reduces the risks to Avaya, as the syndicate of brokerage firms will share the liabilities. For most companies, this is providing them with a way of ensuring that the offering is fully subscribed to by: utilizing the established customer base of large financial institutions. However, the problem is that this can cause the majority of shares in the IPO to go to select clients (who are purchasing large blocks of stock). (Klassen, 2011) (Carter, 2005) ("Traditional IPOs vs. Auction-Based IPOs," 2011)

Once the company begins trading, is when most investors will be locked out of the offering (which requires them to pay more for the stock in the open market). As a result, the majority of firms will have to weigh the possible risks of using this process and the amount of safety that is provided. This could have an impact on how well the stock performs and the kind of investors Avaya will attract. Given the fact that the company was once a publically traded firm and is well-known, the odds are high that shares will become oversubscribed using a traditional IPO. Therefore, the best approach will be to use the public action strategy, to ensure that everyone has equal access to this issue. (Klassen, 2011) (Carter, 2005) ("Traditional IPOs vs. Auction-Based IPOs," 2011)

Advantages of each type of IPO

Like what was stated previously, the biggest advantage of an auction-based IPO is that it can provide everyone with equal access to the offering. This can help a firm to attract more investors and make certain that the underlying amounts of volatility are dramatically reduced. If Avaya is using this process, it will provide the firm with a good strategy of reaching out to new investors. This will ensure that the company has a strong amount of support for the offering and any kind of future financing related activities. (Klassen, 2011) (Carter, 2005) ("Traditional IPOs vs. Auction-Based IPOs," 2011)

The biggest advantages of utilizing a traditional IPO are: lower risks, greater guarantees and a streamlined process. These areas are providing benefits to companies because the investment bank will form a selling group (i.e. syndicate) to market the offering. This ensures that there is a guaranteed client base and reduced risks by having the brokerage firms aggressively involved. This will streamline the registration process, to ensure that the company is able to begin trading when the market conditions are most favorable. For most corporations, this is the best approach in reaching out to potential investors and limiting the risks. However, in the case of Avaya, these advantages may be reduced because the firm is so popular. (Klassen, 2011) (Carter, 2005) ("Traditional IPOs vs. Auction-Based IPOs," 2011)

Costs and risks of each type of IPO

The costs are lower for auction-based IPOs. This is because there is no indication of the interest taken from clients in advance. Instead, the price of the offering is set well above what anyone is willing to pay and is gradually lowered to attract the most demand. This ensures that the company is able to reduce investment banking fees, by not having to seek out some kind of indication of interest. Instead, the market forces will decide the final price and the actual amounts of demand. This lowers the fees that are paid during the registration process with regulators. ("Traditional IPOs vs. Auction-Based IPOs," 2011)

The biggest risk associated with using this kind of IPOs is that it could be undersubscribed. This is because, there are no large clients to purchase blocks of stocks. Instead, trading volume is lighter than expected (which can cause the price to fall below the IPO price). When this happens, it makes is difficult for the company to raise the working capital they require. In the future, this could have an impact on possible secondary and debt offerings. ("Traditional IPOs vs. Auction-Based IPOs," 2012)

The costs are much higher with a traditional IPO. This is because there will be fees and commissions that are paid out to the brokers in helping to market the offering. This will require that the firm must sell more shares in the open markets to raise the kind…

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