AVG Technologies offer freeware security including other products that are used by more than 107 million users in 186 countries. The company’s products target the small markets and customers. The services given to the customers include safety software, identity protection, mobile security, online backup, PC performance optimization and internet security. The company has a differentiated business strategy. This is because it raises revenue through subscriptions of premium products and value adding on-line products to various users. This paper evaluates the advantages, costs and risks of both traditional and auction-based initial public offers.
The main goal of AVG conducting an Initial Public Offer is to raise capital funds for growth and to run its operations. The company has the option of using the traditional IPO or the Auction-based initial public offering (Burrowes, 2004). The Auction-based IPO can be described to have advantages for both investors and companies. However, this form of IPOs has more risks when compared to the traditional IPOs. Google and Morningstar are among the few companies that have had success when using auction-based IPOs. Considering the completion in the market and the seasonality of a company’s performance, AVG should employ the traditional initial public offering.
Advantages of the different forms of IPOs
This form of IPO involves the hiring of an investment bank which can be described as an underwriter. The investment bank in consultation with the issuing company will research on the market value of AVG. In addition, the investment bank will evaluate the capital requirements of AVG. As such, the company’s management together with the investment bank will make a decision on the number of shares that will be issued (Kleeburg, 2004). The price of the share will be determined by discounting the current market value of the company. After the technical process of evaluation of shares and the amount of capital available, the company will market the shares to the wealthy investors and allocation to those interested with the shares is done.
There are various advantages in using the traditional IPO. The company can make sure that it allocates all the willing investors some shares especially if there is an over subscription. As such, the company has an option of not allocating the investors all the shares they have committed to buying. The issuing company is at an advantage in that it does not incur direct costs in relation to the underwriters. This is because the investment bank will be paid by a percentage of the amount raised by the IPO; it is a form of commission. Furthermore, the investors will start trading with the shares on the first day of open trade. The traditional IPOs price is usually a discounted amount of estimated market value. As such, the company’s stock price would trade at a higher price creating capital profits to current investors thus attracting new investors (Khurshed, 2007).
In a traditional IPO, the largest cost incurred by the company is the underwriter’s fee which is a percentage of the share price and shares sold. In addition, some investment banks require companies to pay some allowance fees. The company will also incur legal expenses, marketing fees, printing costs and accounting expenses. The company also incurs opportunity costs as a result of the valuable time used by management in monitoring the initial public offer process.
The traditional IPO faces some risks. This is because the initial public offer requires the company to disclose most of its business and financial information. As such, some of the information may be used by the competitors, customers or suppliers against the company. In addition, the company faces risks that the required capital funds might not be raised from the IPO due to under subscription of the shares (Burrowes, 2004).
This form of IPO is internet based. However, the company still uses the services of an investment bank as an underwriter of the IPO. The costs incurred are lower compared to the traditional IPO. The company determined the amount of capital it requires, the amount of shares available and the reserve price. In this form of IPO, there is no allocation of shares. The investors interested with the share will bid the amount of shares they require and the price at which they are willing to purchase the shares (Khurshed, 2007). The management still has an option of marketing the shares to the large investors. Research shows that the Auction-based IPO results to lower prices during the fast days of trading. However, in the case of Google there was a 17% gain on the opening price.
There are various advantages of using this form of IPO and higher risks too. The auction-based IPO enables the small, modest and large investors participate in the IPO. Another advantage of the IPO is that it has all the requirements of a traditional IPO. However, the charged by the underwriters are significantly lower. The opening stock price is usually lower than the selling price. As such, this is an advantage to the company because the profit is earned by the company rather than the investors.
The cost that the company will incur when using this form of an IPO include underwriting costs and marketing expenses. In addition, the company incurs costs for the legal and accounting purposes. The Auction-based IPO has lower costs than the traditional IPO. However, this form of IPO faces more risks. There is a risk that the auction process will not efficiently price the IPO. As such, the investment return may be significantly lower when compared to the traditional IPO. In addition, there is a risk that some bidders will introduce unpredictable variables in the auction.
In a nutshell, AVG should use Traditional IPO because it has lower risks. A high opening price will also attract investors. As such, the company will become more competitive, and its growth prospects will be better.