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Custom Initial Public Offer Essay

The process of establishing IPO and getting to decide matters pricing of the shares is entirely dependent on the methodologies used, by the issuing company, when offering these shares to potential public investors. In most cases, the approach takes the traditional process which uses investment banks as brokers for purchasing the shares. However, this trend has been witnessed to include such methodologies as Dutch auctioning as well as online auctioning process. The research paper therefore tries to examine the efficiency as well as the effectiveness of online auctioning process in matters share pricing and sourcing for funds.

In the Dutch IPO mechanism bidders are allowed to reveal prices that they are willing and able to pay for shares as well as the volume of shares they are able to purchase at any given time. The responses gathered from the potential investors, are used to draw a demand curve that is utilized by the issuing company to allow the individual investors participate in the process of pricing. The final price in this form of auctioning is considered to be the lowest purchase price for all the shares offered for sale. The approach limits the role of investment banks which in most cases are used as brokerage firms (Investment Dealers’ Digest, 2004).

The online auction process of shares is a methodology that was established to fill the gap existing between offer prices in IPO’s and the resultant opening price. This approach is considered to have been put in place in the course of dot.com era. In this era, the internet was used as a platform for which companies hoping to go public place their respective shares. History holds it that the first form of online auctioning process took place in 1999 through Open IPO. Com, in which, the Hambert & Quist Investment Bank utilized the approach to source funds for expansion.

Existing differences between Auction IPO and Traditional Book building Mechanism

The online auctioning of IPO’s is renowned for its capability to minimize the first day price surge experienced after  trading of stocks commence. Both the traditional approach of book building mechanism and online auction of IPO’s are determined by a resultant size of the underwriter involved in the processes as a whole. The traditional book building mechanism allows for a rigorous form of analysis into the prospectus company offering the shares. In this case, both the individual and institutional based investors are provided with detailed information about the manner in which the sourced funds will be used. Therefore, it means that potential investors are accredited with symmetrical levels of information that they can utilize to make sound and effective decisions in the course of purchasing the shares.

However, this is not the truth with online auction process of issuing IPO’s in the sense that the information provided by the issuing company is generalized. The generalization is as a result of the companies not being obligated to provide the information over the web. Therefore, this means a level of unevenness is attained in the part of potential investors especially that they are not included in the determination of the offer prices for the shares altogether. In fact, high priority is given to the institutional based investors despite the fact that the small investors constitute the majority of potential shareholders (San Jose Business Journal, 1999).

It should be noted that the information required by potential investors are concerned with matters finance. This means that the issuing company is expected to present the financial break down indicating the manner in which the sourced funds will be utilized. However, the SEC does provide an exception that prevents companies from illustrating on the manner for which funds will be used. This exception criterion is referred to as the “quiet period”.

Another notable difference between the two processes arises in the types of beneficiaries for each of the process. In the traditional methodology of auctioning shares, the beneficiaries are the selected potential investors with the investment bank for they are favored by the appreciating prices caused by the minimized offer-to-open price index. This beneficial value accorded to the preferred investors is attained whenever investments banks conduct “road shows” in which they pay visits to potential investors who feed them with relevant data that is later used to draw demand curves. The demand curve is then used to determine the initial offer price for the shares. The company conducting the “road shows” later rewards the surveyed potential investors by allotting them the IPO stock of shares which is later sold at a higher opening price after first day of price surge. In online auctioning process of IPO, the value for traded shares is restored and enjoyed by the issuing company (Knight Rider Tribune Business News, 2004).

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Reasons for Choosing Auction Mechanism: Google Case Study

Google embarked on using the online auction process of trading shares for so many reasons. Firstly, it was not ready to expose the manner in which it was going to utilize the funds collected and by so doing, playing it safe. The Company got aboard with online platforms as it knew that it was going to enjoy “quiet period”, blanket mechanism formulated by the SEC in which companies offering their respective shares to the public are not obligated to showcase the companies’ financial strategies. Therefore, it is safe to assume that the Company had to offer the shares in the online platform since the majority of the potential investors are small investors that are considered to be reluctant to attend company presentations concerning the matter at hand.

The Company also embarked on utilizing the online auctioning platforms in order to record a positive increase in the offer-to-open price index of shares altogether. In this way, the Company eliminated the middlemen (investment banks) and dealt directly with the potential investor hence indirectly accrediting the firm with more funds as most of the shares were held and sold immediately after they started trading. The money collected is assumed to have been injected back into the expansion of such activities as Google Talk as well as increasing the G-mail base for its end users.

In my thinking, I believe that Google’s decision to undertake online auctioning of its shares was a success altogether. This is because the Company fetched substantive funds from investors which were later used for expanding the activities of the firm. Expansions of the activities include the introduction of the new product: G-Talk (Los Angeles Times, 2005). It is also fair to assume that the Company, indeed, made a substantial amount of money especially that its shares declined to surge on the first day of trading. This catapulted the senior management as well as the co-founders to sell shares at an abnormal price. The IPO was offered at $ 100 which shot to a price of $ 317.08 in a short period of time (Wall Street Journal, 2004).

I also think that the auction IPO meet its initial objectives since Companies considered to be unpromising in matters of funding end up gathering more than what the critics expected. For example, Morningstar got to a high success level when it collected a substantial amount of funds, thanks to the absence of the first day price surge that is a common characteristic of online auctioning process.

Shortfalls for Online Auction Process of IPO’s

The main shortfall attributed to online auction process lies with its disregard to provide extensive information pertaining to the sources for which share price is determined. This shortfall promotes the exception granted to Companies, by SEC, prevents potential investors from perceived the manner in which the accumulated funds will be utilized. Another shortfall attributed to online auctioning process lies with the fact that it eases the procedures needed for companies undergoing public mentioning despite their respective challenges in doing so the traditional way and may thus deceive potential investors with their performance hence making irreparable decisions leading to substantive losses of money altogether.

Custom Initial Public Offer Essay

Code: Sample20

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