Term Paper: Initial Public Offerings

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¶ … Public Offerings

Morningstar's & Google's model of raising capital through online auctions- should it be followed by a Corporation?

Morningstar's announcement of taking the online auction route to raise capital in its Initial Public Offering - IPO didn't raise any eyebrows since Morningstar has a long record as being vigilant for the individual investor. Under a normal IPO offering, it is the investment bank who allocates the shares directly to the institutional and other preferential clients. But in the case of Morningstar, the lead underwriter presently WR Hambrecht in place of Morgan Stanley will hold an auction to determine the price band to be set and manner in which the shares will be divided. Under such type of method, the advantage remains that even the small guys will be able to participate in the action. In the opinion of Tom Taulli an IPO specialist of www.currentofferings.comthe scheme of things aligns with the culture of Morningstar that everybody must have a justifiable share. The auction method is a transparent system from the allocation point-of-view as shares are not given to the favored funds or people; rather they are given to the people who made the bidding in the correct fashion regardless of the system that one is a small fund or a bigger fund. (Carter 2005)

However, this type of raising capital through the online auction route it does not find favor in the market. Google adopted a similar method wherein Morgan Stanley and Credit Suisse First Boston were the leading underwriters; however conventional investment banks continue to disregard the auction process. This is because of the fact that if shares are sold by the auction process, investment banks would lose billions of dollars in underwriting fees and more importantly they would no more control the allotment process of the precious IPO shares. In fact that might be the cause behind Morgan Stanley, Deutsche Bank Securities, and William Blair, all remaining aloof from the Morningstar deal. Nevertheless, the exercise was a timely initiative for the company because its integrity in the investment world has come under the scanner after regulators started investigating into its deals. (Carter 2005)

The Securities and Exchange Commission started an investigation associated with inaccurate data Morningstar released on a mutual fund. Morningstar first declared its intention to offer shares through IPO way back in May 2004 but things didn't materialize. The possible reason might be that the delay relates to Morningstar's interest to put the unorthodox auction method for issuing shares. Regardless of the reasons, selling shares through the auction route is an important public relations victory for the company and also a big snatch for Hambrecht that has long being a supporter of the auction process. Nevertheless, it has been entailed in just small business deals like for example the IPO of Redenvelope -- REDE and Overstock.com. It would suffice to say that the Morningstar is a marquee business deal for Hambrecht, one which has the potential of bringing the auction process to the centre stage. (Carter 2005)

Potential risks, potential benefits, and to Morningstar's experience to support your argument:

conventional IPO is managed by a team of investment bankers who collect interested institutional investors and determine the share price. Under an auction IPO, the investors are required to submit an offer and the company sells shares at a single price in favor of list of investors ranked by how high they had put in the bid. The benefit of the auction route is that a conventional IPO is an expensive proposition and can make a windfall profit in case the stock commands a high price from the point it starts to trade publicly. However the risk involved is that some companies are afraid that they might not be successful in drawing interest in an auction, that large institutional investors will not bid for their stock, and analysts at investment banks, ignored in the IPO process, will overlook them as a public company. Other companies which have filed IPO auction paperwork are all small but carry out their business in diverse field. After Dover Saddlery, Traffic.com which provides reports to radio and television and IDT Spectrum Inc. that has the licenses for wireless spectrum, both registered. (Syre 2005)

Another company Avalon Pharmaceuticals Inc. also filed an auction IPO. The managers at the four companies watched closely the… [END OF PREVIEW]

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Initial Public Offerings.  (2007, May 30).  Retrieved December 10, 2019, from https://www.essaytown.com/subjects/paper/initial-public-offerings/1954

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"Initial Public Offerings."  Essaytown.com.  May 30, 2007.  Accessed December 10, 2019.
https://www.essaytown.com/subjects/paper/initial-public-offerings/1954.