What Type of Ipo Should Avaya Use - a Traditional Ipo or an Online Auction Essays

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Course Number: FIN501

Module 1 Case Assignment
Introduction
Upon deciding to go public, a company looks into preparing an initial public offering (IPO). There are two IPOs with which a company can utilize: a traditional IPO or the relatively new Auction-based IPO that was made popular by Google. Avaya is currently planning for IPO. “Avaya is a global leader in business communications systems. The company provides unified communications, contact centers, data solutions and related services directly and through its channel partners to leading businesses and organizations around the world” (Avaya.com, 2011). Avaya’s current plan of an IPO valued at approximately $1 billion (Klassen, 2011) needs to consider whether to go with a …show more content…
Once bidding in the auction begins, investors have the opportunity to enter a bid for the number of shares and price they want to buy them for. These auctions normally use a Dutch auction format, where the company sets a price above what they expect any investor to bid and incrementally reduce the price until someone bids. After the bidder is sold their number of shares, the price continues to drop until all of the offered shares have been sold. The price paid by the final bidder is the price that all previous bidders pay (Clinton, 2011).
Smaller companies often find auction-based IPOs to be enticing because of the lower fees involved and the likelihood that the share price will be closer to market value is greater, which means the company made more of the profits than the investors on the first day of trading (Clinton, 2011). While Auction IPOs average only a 29-30% price increase in the first day of trading (Hensel, 2009), there are fewer underwriters to choose from as many banks do not participate in Auction IPOs. This does not allow for the optimal price in underwriting fees for Auction IPOs, although due to the decrease in work for the underwriter a fee of 4-6% is normally charged. The downfall to this is loss of positive press the company would receive for the substantial increase in stock price on the first trading day, losing valuable publicity
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