Traditional vs. Auction IPO: Best Method for AVG Technologies
This paper examines the two primary methods of conducting an initial public offering (IPO) — traditional bookbuilding and the auction-based Dutch auction — in the context of AVG Technologies' planned listing on the New York Stock Exchange. The paper evaluates each method across several dimensions, including investor type, cost structure, underwriter fees, SEC requirements, and risk exposure. Drawing on case studies of Google and Morningstar, it analyzes how company visibility and marketing capacity influence the suitability of each approach. The paper ultimately recommends that AVG pursue the traditional bookbuilding method, arguing that the company's lower brand recognition and limited marketing infrastructure make the auction route too risky despite its potential cost advantages.
- Introduction: AVG Technologies and Its IPO Decision: AVG's background and IPO planning context
- Traditional Bookbuilding vs. Auction-Based IPO: Key Differences: Defining and distinguishing the two IPO methods
- Investor Profiles and Market Reach: How each method attracts different investor types
- Cost Structure and Underwriter Fees: Fee comparisons, spreads, and SEC costs
- Risk Considerations: Risks of undersubscription and unsold shares
- Recommendation: Bookbuilding as the Best Fit for AVG: Final recommendation and reasoning for AVG
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What makes this paper effective
- The paper grounds its analysis in a real, named company (AVG Technologies), giving the argument practical relevance and a clear decision-making context throughout.
- It uses concrete case studies — Google and Morningstar — to illustrate when an auction IPO succeeds and why those conditions do not apply to AVG, strengthening the comparative argument.
- The recommendation is well-supported: the paper explicitly ties AVG's specific characteristics (Czech origin, low consumer visibility, small staff) to its conclusion, rather than making a generic claim.
Key academic technique demonstrated
The paper demonstrates applied comparative analysis: it systematically evaluates two policy options (bookbuilding vs. Dutch auction) across multiple criteria — investor mix, cost, risk, and company fit — before arriving at a reasoned recommendation. This structure mirrors professional financial advisory writing and shows how academic evidence can be used to support a practical business decision.
Structure breakdown
The paper opens by introducing AVG and framing the IPO decision. It then defines and distinguishes the two IPO types before comparing them on investor profile, cost, and risk. Case studies of Google and Morningstar serve as evidence in the middle sections. The paper closes with a clear recommendation tied directly back to AVG's specific circumstances, giving the argument a logical, self-contained arc.
Introduction: AVG Technologies and Its IPO Decision
AVG is a software company known for its suite of online security products. The company has 106 million customers and a variety of products that it markets to both businesses and consumers. It announced in January 2012 that it intended to file for an initial public offering (IPO), with plans to float on the New York Stock Exchange (AVG, 2012). In order to proceed, the company must determine which type of IPO best suits its needs. To make that determination, AVG and its underwriters need to take several factors into consideration, evaluating the distinct characteristics of each IPO method before arriving at an informed decision.
Traditional Bookbuilding vs. Auction-Based IPO: Key Differences
In a traditional IPO, the company hires an investment bank. The bank researches the market value of the company and determines the number of shares to be issued. The price per share is set, and the investment bank then markets the offering to its clients or builds a consortium of banks to market the offering. The bank takes a percentage of the proceeds as commission (No author, 2011).
An auction-based IPO, by contrast, relies on the Internet to find its pool of investors. An investment bank is still required, but it performs considerably less work because it does not carry out the marketing function. In addition, the company typically sets the price and the number of shares to be issued. The format of the auction is typically a Dutch auction, in which the company sets an initial price higher than any investor is expected to bid and then lowers the price until bidding begins.
Investor Profiles and Market Reach
A traditional IPO is likely to attract the established IPO investor. The investment bank markets the offering to institutional buyers first, as they are the largest and most important customers. Allocations are then made to retail investors through their brokers. On a successful IPO, however, the bulk of investors will typically be institutional. An auction-based IPO is likely to attract a different mix of investors — ones who may take a more active role in their investments. These investors conduct their own research and set their own price for what they believe the shares are worth.
Because auction-based investors must conduct their own due diligence, the auction IPO will also skew heavily toward institutional investors. However, the average retail investor can participate in the auction process, which opens the pool of potential investors to a larger group and, in theory, contributes to a higher price for the issuing company (Slate, 1999).
The high costs associated with the traditional IPO reflect the services the investment bank provides. Notably, the bank is able to funnel lower-priced shares to its best clients. With an auction IPO, the competitive bidding process for shares remains, which in theory should deliver a higher price to the issuing company. Morningstar, for example, opted for an auction IPO because it believed that giving individual investors greater access to the offering would yield a higher price. Individual investors, it reasoned, were less likely to be deterred by the government investigations of the company that were ongoing at the time (Countryman, 2005).
Weinberg (2004) notes that Google took the same approach, believing it could obtain a higher price through the auction method. Individual investors in particular are less likely to conduct thorough due diligence and may also hold the stock for a shorter period of time, making them less concerned with long-term considerations. For Google, the auction process was seen as a means of leveraging strong individual investor demand — given the company's high visibility — to increase the total value of the issue. It is worth noting, however, that this type of price inflation is not universally considered beneficial, as it reflects price movements rooted in lower investor information rather than higher (Wilhelm, 2005).
Works Cited
AVG. (2012). AVG Technologies announces filing for proposed initial public offering. AVG Technologies. Retrieved November 15, 2012 from
Chahine, S. (2004). Underpricing vs. gross spread: New evidence on the effect of shares sold at the time of IPOs. EFMA 2004 Basel Meetings Paper.
Countryman, A. (2005). Auction seen lifting Morningstar's IPO price. Chicago Tribune. Retrieved November 15, 2012 from
Investopedia. (2012). SEC fee. Investopedia. Retrieved November 15, 2012 from http://www.investopedia.com/terms/s/secfee.asp
No author. (2011). Traditional IPO vs. auction-based IPO. eSortment. Retrieved November 15, 2012 from
Slate. (1999). What is a Dutch auction IPO? Slate Magazine. Retrieved November 15, 2012 from http://www.slate.com/articles/news_and_politics/explainer/1999/05/what_is_a_dutch_auction_ipo.html
Weinberg, A. (2004). IPO Dutch auction vs. traditional allocation. Forbes. Retrieved November 15, 2012 from http://www.forbes.com/2004/05/10/cx_aw_0510mondaymatchup.html
Wilhelm, W. (2005). Bookbuilding, auctions, and the future of the IPO process. Journal of Applied Corporate Finance, 17(1), 2–13.
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