Public Offerings Morningstar's & Google's Term Paper

Excerpt from Term Paper :

The executives at Morningstar had deliberated that their decision with a lot of people, inclusive of critical investment bankers prior to the actual offering. The minimum experience of an auction IPO companies are normally encouraging. One recent occurrence has been the recent exclusion wherein CyroCor Inc. offered shares through the auction route at $11 per share in a July auction and has lost 50% of its value since then. It follows from this that the auction route for raising capital through issue of shares does not favor every company. However, there are some positive aspects and companies must fancy the odds of auction route as the real option. All companies encounter a non-stop auction for their stock from the point they start trading in public. (Syre 2005)

Wall Street was extremely cynical as regards the Google's Dutch-auction IPO, that restricted banker's impact by opening biding to the public and fixing a debut price though the vagaries of supply and demand. Notwithstanding the success of the $1.7 billion Google sale, that witnessed a 17% spurt in price on the day of the auction issue, after a year just a limited number of companies have shown interest in raising capital through the auction route. Besides, traditional investment banks are not near in following the method. However, after Google set the example, some companies started exploring the option, although the technique was limited to few companies. People subscribing to this view also observe that Dutch-auction have grabbed some remarkable successes in the last one year. The benefit of the deal with Morningstar was the inherent openness and the transparency of the auction route as it works in the business of supplying information to the investors. (Carney 2005)

Another benefit of the auction method is its cost-effective structure which at a fee of nearly 2% which is lower than the range of 3% to 5%. Hambrecht normally charges as Morgan Stanley had since done some due conscientiousness. The Morningstar which was priced at $18.50 went up nearly 8.5% on the very first day, closing at $32.75 and the fund managers with the company expressed happiness with the developments. One more company- the New River Pharmaceuticals - NRPH, a Virginia-based pharmaceutical company that started off at $8 raised $33.6 million. Subsequently, its price has gone up to $40. This has been the best-performing IPO within the last twelve months, on a percentage basis even surpassing Google's post-IPO surge. (Carney 2005)

Of late the recent revival in the IPO market in the U.S. brings forth the issue whether the conventional IPO issue is somewhat efficient in pricing the IPO's compared to the online auction. Lowering the price hammering of the IPOs on the first day has been a vital subject since the dot-com period. To cite some examples, Enel witnessed a mammoth difference between its issue price and open price of 966.9%. VA Linux saw a surge of 896.7% and Sycamore Networks experienced growth of 612.8%. It is seen that under the conventional method of IPO, the investment banks underwriting the issue market the issue basing on the strengths of the company. (Hensel)

As a reciprocal gesture, these investors sometimes get the initial allotments of IPO shares in part so as to compensate them for making public this pricing information, and therefore profit from the price advantage gained in the price surge on the inaugural day. Detractors of the conventional IPO allocation process debate that these investors benefit the most from the price increase compared to the issuing company. To eliminate this problem, Dutch auction process that was developed by W.R. Hambrecht was behind the mechanism of the Google's IPO and represents one of the latest endeavors to efficiently price IPOs such that the issuer obtains the more precise description of financial status of the company. (Hensel)


Carter, Adrienne. "Morningstar Follows Google's Lead" Business Week, 10 January, 2005.

Carney, Beth. "IPOs: Going, Going.. Not so fast" Business Week, 16 August, 2005.

Hensel, Nayantara. "An empirical analysis of Online Auction IPO Processes and Traditional IPO

Processes" Graduate School of Business and Public Policy U.S. Naval Postgraduate School,

Syre, Steven. "The IPO path less taken" the Boston Globe, 1 September, 2005.

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