Online Auction IPOs: Morningstar, Google, and Capital Raising
This paper examines whether corporations should adopt the online auction model for Initial Public Offerings (IPOs), using Morningstar and Google as primary case studies. It contrasts the Dutch-auction IPO process — championed by underwriter W.R. Hambrecht — with the conventional investment-bank-led IPO, analyzing differences in share allocation, pricing efficiency, underwriting costs, and transparency. The paper evaluates the potential benefits (lower fees, broader investor participation, reduced first-day underpricing) alongside the risks (lack of institutional interest, analyst neglect, and uncertain demand). Historical examples, including New River Pharmaceuticals and dot-com-era IPOs, are used to contextualize the debate over which method better serves issuing companies and retail investors.
- Introduction: The Auction Route to Capital: Morningstar's decision to use auction-based IPO
- How the Auction IPO Works Versus the Traditional IPO: Mechanics of auction vs. conventional IPO process
- Risks and Benefits of the Auction IPO Model: Advantages and drawbacks companies face with auctions
- Google's Dutch-Auction IPO and Market Reaction: Google's auction success and lingering market skepticism
- Cost Efficiency and Notable Auction IPO Outcomes: Lower fees and strong post-IPO performance data
- Pricing Efficiency and the Case Against Conventional IPOs: Dot-com underpricing evidence favoring auction model
- Conclusion: Should Corporations Follow the Auction Model?: OpenIPO as solution to conventional allocation inequity
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What makes this paper effective
- Uses two high-profile real-world cases — Morningstar and Google — to anchor an abstract financial concept in concrete, well-documented events, making the argument accessible and credible.
- Balances both sides of the debate by acknowledging the legitimate concerns of companies wary of auctions (insufficient institutional interest, analyst neglect) while presenting quantitative evidence of cost savings and post-IPO performance.
- Draws on multiple Business Week sources and an academic paper from the Naval Postgraduate School, demonstrating use of both journalistic and scholarly evidence.
Key academic technique demonstrated
The paper demonstrates comparative analysis: it systematically sets the auction IPO mechanism against the conventional IPO process across multiple dimensions — cost, transparency, pricing efficiency, and stakeholder incentives — before drawing a qualified conclusion. This structured comparison keeps the argument focused even as it moves through several examples.
Structure breakdown
The paper opens with Morningstar's IPO announcement and the rationale for choosing the auction route, then explains how the mechanism differs from conventional IPOs. It next surveys risks and benefits with supporting examples (CyroCor, Dover Saddlery, Avalon Pharmaceuticals), examines Google's Dutch-auction precedent and market skepticism, highlights cost and performance data (New River Pharmaceuticals), and closes with a broader argument about pricing efficiency drawn from dot-com-era data and the OpenIPO framework.
Introduction: The Auction Route to Capital
Morningstar's announcement that it would take the online auction route to raise capital in its Initial Public Offering (IPO) did not raise many eyebrows, given the company's long record of vigilance on behalf of the individual investor. Under a normal IPO, it is the investment bank that allocates shares directly to institutional and other preferred clients. In Morningstar's case, however, the lead underwriter — W.R. Hambrecht, in place of Morgan Stanley — would hold an auction to determine the price band and the manner in which shares would be divided. The primary advantage of this method is that even small investors are able to participate in the process.
In the opinion of Tom Taulli, an IPO specialist at www.currentofferings.com, the approach aligned with Morningstar's culture that everyone deserves a fair share. The auction method is a transparent system from an allocation standpoint: shares are not given to favored funds or individuals, but rather to those who bid correctly, regardless of whether they represent a small fund or a large one. (Carter 2005)
However, this method of raising capital through online auctions has not found widespread favor in the market. Google adopted a similar approach, with Morgan Stanley and Credit Suisse First Boston serving as lead underwriters, yet conventional investment banks continue to disregard the auction process. The reason is straightforward: if shares are sold through auction, investment banks lose billions of dollars in underwriting fees and, more importantly, lose control over the allotment of IPO shares. This may explain why Morgan Stanley, Deutsche Bank Securities, and William Blair all kept their distance from the Morningstar deal. Nevertheless, the exercise was a timely initiative for Morningstar, whose integrity in the investment world had come under scrutiny after regulators began investigating its dealings. (Carter 2005)
The Securities and Exchange Commission had opened an investigation related to inaccurate data Morningstar released concerning a mutual fund. Morningstar first declared its intention to offer shares through an IPO as far back as May 2004, but the process was delayed — possibly because of the company's interest in pursuing the unorthodox auction method. Regardless of the reasons for the delay, selling shares through the auction route represented an important public relations victory for Morningstar and a significant win for Hambrecht, which had long championed the auction process but had previously been involved only in smaller deals such as the IPOs of Redenvelope (REDE) and Overstock.com. The Morningstar deal was a marquee transaction for Hambrecht, one with the potential to bring the auction process to center stage. (Carter 2005)
References
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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