Study on Initial Public Offerings and Going Public Finance Essay

[Synopsis: This is a 4 page research paper, written in APA format discussing the type of IPO that E-bay should use to take Skype public. This is based on the type of investors Skype is likely to attract, lessons learned from Google and Morningstar from their auction IPOs and the cost and risks of each of the two types of IPO. The paper further describes the steps that a firm must take in order to go public, identifies success factors for a firm making the IPO decision and discusses and analyzes the different types of IPOs. The paper relies on 5 sources.] Abstract Initial Public Offerings transforms a privately owned company to a public one with an onset of a new trading opportunity. Several steps should be taken for a company to realize successful IPO, starting with the company’s registration with Securities and Exchange Commission. IPO offers companies an opportunity for growth and expansion through gaining access to public capital market that has no interest charge.

There are several types of IPO, the common ones being the traditional IPO and the online auction. Companies like Google and Morningstar that utilized online auction initially encountered opposition but eventually succeeded. This paper discusses the IPO method that Skype should employ in its IPO venture, and gives benefits for companies considering IPO as well as IPO steps to be taken. The Type of IPO That E-Bay Should Use To Take Skype Public E-bay should use online IPO auction instead of the traditional IPO to go public. This is because unlike the traditional IPO which is limited to a few investors, calls for an underwriter and sets the price of IPO based on company’s anticipated capital as well as the amount of shares to be offered, online auction gives an opportunity to a large number of people to participate in the auction and limits the number of middle men thus cutting down on the cost involved in IPO as well as the final IPO price (Stock Market Investors, 2008). Going by the case of Google, whereby the initial investment return was lower than anticipated Skype is projected to increase its revenue by more than double and therefore should the company encounter lower investment returns than projected, it will easily accommodate the changes. Furthermore, such low investment returns would only be for a short period of time and returns would increase as the company provides people with more auction details and use of capital during the auction process.

This method was used by Google with some initial resistance but was eventually successful (Hensel, 2005). Since Skype is a well known company that is widely used internationally, it can easily increase publicity on its online auction through advertisement to attract more investors and increase its sale of shares to compensate for the initial low investment returns. Furthermore, the beneficiaries of subsequent price appreciation for the online auction would be the initial investors and co-founders of Skype instead of favored clients of investment bank as is the case with the traditional IPO (Carter, 2005). This means that the initial mispricing in online auction would indirectly benefit the company. As Hensel (2005) highlights, Morningstar’s public auction was a total success, with 8.4 percent increase on the first trading day.

Given the fact that online auction is an upcoming IPO method and people may not have sufficient information on its benefits, it should be given a chance, probably with some amendments such as modifying the quiet period, it will completely overtake the traditional IPO method. The Steps that a Firm Should Take in Order to go Public Initial Public Offerings transforms a privately owned company to a public one with an onset of a new trading opportunity (Stock Market Investors, 2008). The first step that a firm should take in order to trade publicly is to register with the Securities and Exchange Commission (the SEC). This is followed by preparation of public offering which includes company’s prospectus alongside other legal documents required by Securities and Exchange Commission (Stock Market Investors, 2008). The next step after registration with SEC is to set the price of the stock. The company enters into contract with investment bank, signing a contract to facilitate distribution of shares that it intends to sell, agreeing on initial price at which the stocks will be opened for sale, based on company’s earnings or potential earnings and growth as well as considerations for market’s willingness to accept the set price (Stock Market Investors, 2008). This is followed by the first offers which are usually offered to major broker clients by the company’s underwriters. The broker clients then offer the stock bundles to their major institutional and retail customers (Stock Market Investors, 2008). In this chain, each participant gets his own share of profit such that by the time it is the final investor’s turn, the final price is higher than the IPO. Success factors for a firm making the IPO decision Any firm going for IPO gets an opportunity for growth and expansion through gaining access to public capital market that has no interest charge because the only reward that IPO investors seek is appreciation of their investment and dividends (Sutton and Benedetto, 1988). Sutton and Benedetto (1988) further explain that the company making an IPO gains increased credibility which may lead to new opportunities, exposure to new customers and room for expansion. Furthermore, the publicity associated with IPO may also generate increased business attention in business press resulting to enhanced credibility for the company with its customers, suppliers and lenders resulting to improved credit.

The company going public is able to use stock creatively as incentive packages for its management and employees. This enables the business to attract better management talent, providing its employees with incentives to perform better. In addition, employees who become part time owners through a stock plan may gain motivation by sharing company’s success (Sutton and Benedetto, 1988). IPO provides the company with public valuation, making it easier for the company to enter into mergers and acquisitions because it is positioned to offer stock instead of cash (Sutton and Benedetto, 1988). Types of IPOs Brealey, Stewart and Franklin (2008) discuss different types of IPO. One type of IPO is the plain vanila IPO which is undertaken by private companies to secure additional funding and determine its fair market value. A venture capital- backed IPO is another type of IPO in which the company management sells its shares to private investors in return for funding and advice. It is an effective scheme for venture capitalists to implement their exit strategy after successfully transforming a firm in which they invested so that it is financially viable in the market (Brealey, Stewart and Franklin, 2008). Reverse-leveraged buyout is another type of IPO whereby the proceeds of the IPO are utilized in paying out debts accumulated when a firm is privatized after a previous listing on an exchange. A spin -off IPO is the type of IPO whereby a large company carves out a stand-alone subsidiary and sells it to the public. It provides firm owners with an opportunity to capitalize mispricing in both subsidiary and parent if the market is not efficient enough. Other types of IPO include; regulation A Offering, which allows public issuance of securities without registration with SEC. Regulation A only requires an offering statement to be filed with SEC after which advertisements may be made without making any purchases until the statement filed is approved by SEC. Regulation A offering may be used to determine if there is any interest in contemplated securities offering. This type of offering is only available to non-public companies and may be used to raise up to five million USD in any 12 month period, with only $1.5 coming from sale of shares (Brealey, Stewart and Franklin, 2008). Direct Public Offering is the type of IPO whereby the company raises its capital by marketing its shares directly to its own customers, employees, suppliers, distributors and friends in the community. These are alternatives to underwritten public offerings by securities broker dealer firms where a company’s shares are sold to broker’s customers and prospects.

Direct public offering is less expensive than IPOs because companies sell their offerings without brokers, hence no commissions are involved. The best candidates for DPO are companies seeking expansion capital (Brealey, Stewart and Franklin, 2008). Conclusion IPO offers a firm an opportunity to increase its revenue and increase its popularity with the public. The type of IPO venture chosen by the company is important because it determines the company’s level of success in the venture, hence a wise decision should be made, based on the amount of capital that the company intends to raise and planned expenses for the venture. Traditional IPO is popularly used although with increasing internet technology, online auction may gain popularity and overtake the traditional IPO.

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