FIN501 MOD 1 Case assign - Essay Example

The organization wants to choose between offering the shares through an online auction or traditional book building techniques. AVG should issue shares through an online auction technique, which is better than the traditional method in almost all aspects. The online auction reaches more investors, it reduces the risks of under or overpricing, and the technique is less costly than book building (Corr, 2007). The organization should follow the rules of the technique strictly to avoid leaving out investors like Google did in 2007.

Online Auction Attracts more Investors than Book Building I would advice AVG to issue its IPO using the online auction because the method is less costly, reaches more customers, and it ensures that the share price is based on its market value. The company reaches more investors by announcing the offer online and allowing customers to bid the price and shares that they would like to purchase (Gregorious, 2006). This is unlike the book building method where underwriters sell shares to the clients that they value more than others (Pequignot, 2005).

The investment banks leave out the investors who bid low prices because the underwriters aim at maximizing their returns (Jones, & Yeoman, 2008). This means that investment banks aim at the wealthy and existing investors in the company. Auctioning allows numerous customers to bid because the online process is open to everyone, and it is cheaper to access the internet (Carter, 2005). AVG is likely to attract new and existing investors ranging from the wealthy to the middle income group in the society using the online auction (Khurshed, 2011).

Auctioning Reduces Costs of Issuing Shares AVG would incur fewer costs using the online auction than the book building technique. The company does not have to incur the high costs of underwriting. These costs refer to the price that the company pays investment banks when they determine the price of issuing each share (Vermaelen, 2005). The costs also include the commission that the firm would pay underwriters to sell the shares by conducting road shows. The commission may be as high as 8% in some cases, and this may be costly for the company especially when it sells a few shares (Nyantara, 2005).

The role of underwriters in the online auction is to help the company to set the price at which to issue shares based on the bids of all customers. This is not costly, and it means that AVG would cut on the underwriting cost. Other costs that the firm would incur using online auction are the Securities and Exchange Commission fee (Savitz, 2012). This fee covers the cost of registering shares with the registrar by way of a prospectus. The securities Exchange Commission fee and other costs account for 10% of the value of the collected capital (Savitz, 2012).

This cost is also incurred using the book building process, and this means that the company cannot avoid paying the price. Auctioning IPO is Less Risky than Traditional Book Building AVG reduces the risk of under or over pricing shares. This is because the directors of the company would determine the value of each share based on the investor’s bids. The bids represent the true value of the shares because the investors symbolize the market (Sherman, 2010). Google oversaw the bids from customers by determining their market price per share without considering the bids.

The company ended up losing capital by leaving out some investors from