Auction-Style vs. Brokered IPO - Skype vs. Morningstar/Google
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Initial public offerings are mature company's entry into public ownership and allow access to shareholder equity. They have traditionally been dominated by investment brokers, but a few recent examples show this is not the only method that can be successful. Do "new" e-commerce enterprises benefit from an auction-style IPO? Or should the tried and true method of investment brokers be retained?
What type of IPO should E-Bay use to take Skype public - a traditional IPO or an online auction?
Some issues to consider:
A. The type of investors Skype likely to attract
B. The lessons learned from Google and Morningstar from their auction IPOs
C. Costs and risks of each type of IPO
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Solution Summary
The internet auction house eBay plans to split its subsidiary, Skype, through an initial public offering of stock (IPO) at some point; based on market conditions, (eBay Inc, 2009). The market conditions referenced in the eBay press release rely heavily on the type of IPO Skype will experience. Just as internet based companies tend to take great pleasure in breaking the mold of established business practice, their conduct of an IPO also is best handled in an non-traditional manner.
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INTRODUCTION
The internet auction house eBay plans to split its subsidiary, Skype, through an initial public offering of stock (IPO) at some point ―based on market conditions,‖ (eBay Inc, 2009). The market conditions referenced in the eBay press release rely heavily on the type of IPO Skype will experience. Just as internet based companies tend to take great pleasure in breaking the mold of established business practice, their conduct of an IPO also is best handled in an non-traditional manner.
AUCTION-STYLE INTIAL PUBLIC OFFERINGS
The competing model for an IPO is best represented by Google or, more recently, Morningstar. Morningstar went public through an auction-style offering in May 2005-the shares rose over 8% on the day, raising $141 million for the underwriting bank (Anonymous, 2005). Assuming that the auction-style offering fueled at least a portion of that intraday growth, it was a great idea for Morningstar to shun the traditional IPO and follow Google's lead. In the weeks to follow, Morningstar officials' secondary offerings certainly benefited from the boost in demand provided by allowing rank-and-file investors access to the IPO. The real benefits for Morningstar, however, were not focused on the capital market.
Morningstar gleaned the majority of benefit from their non-traditional IPO issue from public relations results, rather than capital gain. Regulatory probes into inaccurate mutual fund reporting by Morningstar tarnished its image as a trustworthy, independent voice in the investment community (Carter, 2005). Any business based on the brokerage of information is incalculably damaged by a loss in credibility of that information. The suggestion that Morningstar could be capable of negligent or worse- biased-information is tantamount to a safety recall for a manufacturing company. Clearly the timing for the non-standard, inclusive
IPO could not be better, with the announcement and its conduct a ―major public relations win,‖ (Carter, 2005).
AUCTION-STYLE RISKS AND COSTS IN CONTROL
Public relations gain aside, the auction-style IPO represented a ...
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