Auction-Based Initial Public Offering

NB: We do not resell your papers. Upon ordering, we do an original paper exclusively for you.

NB: All your data is kept safe from the public.

In the year 1999 Philip Rosedale established the company Linden Lab which aimed at developing an innovative way in which people can come together in a 3 dimension virtual world and interact as they build it. The virtual world is known as Second Life and the people who join it, from anywhere around the world, are referred to as residents. In the process of building this world in their own particular tastes and preferences, they share a lot of experiences and entertainment. (Linden Lab). The residents are able to make their own creations and make buildings and they end up with a world complete with an economy of its own. (Second Life,2008).

Through the Second Life Grid, the Second Life provides a stage whereby organizations and individuals with different interests like businesses and businessmen, educators, entrepreneurs and even governments can be able to establish a virtual existence.(Second Life). This has of course brought profound benefits to these organizations and therefore there are more organizations joining it and those which have already joined are increasing their presence.

Linden Lab has about 200 workers who are skilled in 3Dimension graphics, networking and also experts in Physics, drawn from Europe, Asia and the United States, its headquarters are in San Francisco. Some of its current financiers are Catamount Ventures, Globespan Capital Partners, Bezos Expeditions, Mitch Kapor, Benchmark Capital, Omidyar Network and Ray Ozzie.

With its consideration of an Initial Public Offering, its of paramount importance for a company, any organization to look at the past cases of other organizations’ Initial Public Offerings. through this there are a number of vital lessons which can be learnt by the management. These lessons can be in terms of the advantages and the disadvantages of using either of the different types of the Initial Public Offering, the Dutch Auction IPO or the traditional IPO. The managements gets to know the likely problems to be faced and can therefore prepare solutions for them. Through these considerations, the company can also be able to predetermine the types of investors it would like to attract.

Google and Morning Star used the Dutch Auction Initial Public Offering with definitely high levels of success albeit for Google there were a number of lingering questions on the success of the Dutch Auction to ensure efficient pricing of the IPO. (Nayantara Hensel, 2005). For morning Star, their initial lead adviser was Morgan Stanley. The directors at Morning Star proposed and pressed on the idea of using the online auction IPO but the directors at Morgan Stanley advised them against it and when they did not back down on their decision to use it, Morgan Stanley resigned as the lead adviser. Despite this, their role was taken over by W.R. Hambrecht & Co. and the IPO went through without any hitches.( Randall Smith, 2005). On top of that the share prices continued rising even after the first days of trading. These are just a few examples of companies which have successfully used the online auction and with this respect there is no precedent reason as to why Linden Lab should not use the online auction for its IPO, though this also does not completely rule out the possibility of using the traditional IPO.

The types of investors likely to be attracted by Second Life will heavily be dependent on the type of IPO used. For a company that works mainly on the internet and basically all of its customers are internet based, it would only be obvious that it should have enough faith in the online auction process.

When using the online auction for an IPO, the internet is used to open the IPO to a much larger group of possible investors, the share price of the company shares is determined on the basis of the bids coming from the interested investors and the price that manages to fill all the orders given is taken but there is room for a discount being agreed on by the bankers and the company. When using this method, Linden Lab will attract many small time investors. This is mainly due to the fact that the high number of attracted investors will ensure that small amount of shares are allocated to each to satisfy the bidders.

On the other hand, when using the traditional IPO Linden Lab would select an investment banker with whom they would take into account the current market value of the company and the amount of funds they want from the IPO in establishing the price per share the number of shares to be offered. A road show will be conducted in order to attract the large investors, usually institutions or rich persons who apply for different numbers of the shares.(essortment, 2002). When the road show ends the shares are allocated according to the offer price and start trading on the first open day. So if the Linden Lab would like to attract specific large investors, then it would use this traditional IPO.

When a company uses the traditional IPO the costs incurred are usually much higher than the online auction. The investment bank used as lead advisor will be paid a commission which is a portion of the sale plus there are also other fees paid for underwriting the IPO. Apart from the high financial expenses, the traditional IPO also tends to consume a lot of time through the long road shows it involves unlike the online auction.

When the investment bank is on the road show looking for the preferred large investors, there are many ordinary investors who are locked out and this is not a favorable practice with the masses as they are the main customers of most of the companies on the stock markets and should be given an opportunity to have shares in those companies. Still on the issue of spinning in the traditional IPO. This is a situation where the investment bank allocates the shares on offer to possible customers, possible as an incentive, so that they can be able to get business deals with them in the later years. This tends to also lock out the genuine qualifying investors (Troy J. 1997). Troy also points out in his article that there is a huge risk of companies shares being under priced thereby leading to the companies being sold for so much less than what they could fetch.

For auction based IPO, incase the value of the company had been overestimated there is a potential risk of it raising funds less than anticipated. For the investors the risk is that it takes power of control away from as they can only bid and wait to see if they will be allocated shares. Another risk is that of adverse outcome, a situation where there might be too few bidders or some excited investors may end up burned because of overpaying. (Randall S. 2005). It is also worthy to note that, as in some of the questions raised over Google’s IPO sufficient price setting, there is a risk of inefficient pricing of the company shares by the small investors mainly due to lack of information and also in this process the companies are not necessarily required to give too detailed information. (Nayantara Hensel,2005). There is also the possibility of a winners’ curse, i.e. the remorse of the investors that they paid too much for the shares of the company, while could have paid less for the same.(Amalie, 2004).

References

Amalie L. Tuffin. Wral. Localtechwire. More Buzz: About Google: Its IPO Auction Plans Continue To Stir Considerable Interest. 2004. Web.

Linden Lab. The Company. 2008, Web.

Linden Lab. Where worlds are born. Web.

Nayantara Hensel. Harvard Business School. Are Dutch Auctions Right for Your IPO? 2005. Web.

Randall Smith. Heard on the street. Why IPOs Still Use the Old Way. 2005. Web.

Second Life. Membership plans. 2008. Web.

Troy J. Strade. The Evolution of Online Investment Banking. 1997. Web.

Click Here To Order Now!

Auction-Based Initial Public Offering

Do you need this or any other assignment done for you from scratch?

We have qualified writers to help you.

We assure you a quality paper that is 100% free from plagiarism and AI.

You can choose either format of your choice ( Apa, Mla, Havard, Chicago, or any other)