Category: Initial Public Offering

Firms conduct initial public offerings as a strategy to raise the money needed for growth and expansion. Initial public offerings can either involve tradition IPO as well as Auction-based IPOs. In traditional IPOs, companies that aspire to go public engage an investment bank that helps them to underwrite an IPO. The investment bank works together with the firm in researching for the probable market value of the firm.

Depending on the amount of money the firm requires in its growth and expansion, the investment bank and the company determines the value of the share as well as the number of shares the company will offer in order to raise the required capital.

After determining the true market value of the company, the company and the investment banks discounts the estimated market value of the share in order to get the value at which the company will sell its shares. Once the company determines the share price as well as the number of shares to be offered, the firm and the investment bank approaches large investors such as wealthy individuals as well as institutions with the proposed shares.

The institutions and people who are mainly approached by the investment banks are its most royal customers as well as the wealthy group. Subsequently, interested investors commit to purchase some shares at the price given. After the road show process, the investment bank together with the concerned company reviews the investors commitments and subsequently allocates them the amount of shares they had pledged to buy.

The investment bank benefits from a certain percentage of the IPO sale as a commission as well as from other fees charged from underwriting the IPO. Consequently, those investors who have been allocated shares start selling their shares on the initial day of trading (Ansoff, 1963).

Auction-based IPOs is an alternative method used by companies in the privatization process. This method entails availing the IPO to a larger set of prospective investors. In this method of IPOs the firm establishes an investment bank that underwrites the IPO at low cost. Firms determine the cost of the shares as well as the amount of shares they will offer.

The road show flows to educate potential investors about the company without allocating the shares. After this stage, the company opens the bidding of the shares and interested investors place their bids as well as the number of shares they are interested in purchasing.

The most common format of auction based IPO is the Dutch format where the company sets the price above any possible price that any investor is likely to bid for and reduces the price depending on the value of the bids. This process is repeated to other bidders until all the shares have been sold. After selling all the shares, the bidders then pay for their shares at the price that is offered by the final bidder (Weinraub, & Donovan, 2007).

The AVG Company should carefully consider the best strategy to adopt in its privatization process when offering its IPOs (AVG Technology, 2012). The company has two options to consider from; the first one is the tradition IPO method that entails using an investment bank to underwrite as well as allocate shares to potential investors who are mainly the wealthy people as well as institutions that are committed to the investment bank.

The second one is the auction-based IPO that involves availing the shares to a large set of prospective investors by making the allocation of shares open to all interested parties through the bidding process. However, the traditional method of IPOs is not the best strategy for AVG to consider adopting in its privatization process. This is because the option involves high costs to implement.

As a matter of fact, the investment bank that the company employs to underwrite and allocate shares charges a lot of money in terms of fees paid. Another reason why AVG should not opt for the traditional IPO method is because this method involves allocation of shares to few investors at a discounted rate which makes the investors to attain more shares at a much lower price than the actual market price of the share.

Therefore, during the first trading day, the few investors who are allocated the shares sell them at a much higher price because they are limited to a few investors and were allocated at a discounted price. This makes the investors to make a lot of money at the expense of the company that is offering IPOs in order to raise capital that it requires to expand.

The Auction-based IPOs has a disadvantage of not courting institutional investors through allocation of shares at a discounted rate. This is argued as one of the factor that can negatively affect the future performance of the company that adopts auction-based IPOs as it does not attract enough investors to bring an overall capitalization that is greater than that previously owned by the private entity.

Nevertheless, the buying potential of small scale customers should not be undermined and thus, AVG Company should go ahead and offer the auction-based IPOs despite being cited not to have been a very successful option for the Morningstar.

However, the auction-based IPOs worked very well for Google which because Google had established its brand well before going public. Therefore, AVG Company is likely to succeed like Google if it uses auction-based IPOs option since it has already braded well (Carter, 2005).

For these reasons, the AVG Company should opt for the Action-based IPOs instead of the traditional IPO strategy. One of the reasons why it should opt for the auction-based option is because of the economic benefits is has on the company offering the IPOs. The auction-based IPOs allocate the shares at a price close to the market price.

Thus, the increase of the share price during the first day of trading is minimal meaning that most of the profits end up with the company rather than the investors. In addition, there are fewer costs that are associated with this process which makes it more economical for AVG as compared to the traditional IPO option.

Moreover, the overall costs associated with auction-based IPOs are lower because in action-based IPO, the investment bank just requires minimal fees for underwriting the IPO, but it does not charge extra fees as commissions from the sale of shares as the case with the traditional IPO method that charges a commission that ranges from a ratio of 2.2% to 7% for smaller firms.

Another reason why AVG Company should opt for the auction-based IPO method is because of its ability to express its royalty to all its customers. The auction-based IPO process gives all the stakeholders within the company an opportunity to participate in the bidding process in order to enable them to be allocated shares.

This method will ensure that all the investors who are willing to buy AVG shares place their shares when the firm avails its shares online for bidding. Through this process, many customers will become royal to the company as they will realize that they are highly appreciated and valued by the AVG management regardless of their buying capacity.

This attitude is likely to benefit the AVG Company greatly in the long run as all its customers will continue buying its services as a result of their un-discriminatory aspect of the company (Weinraub, & Donovan, 2007).

Since the AVG Company is considering undertaking an important move of privatization in order to raise the capital, it needs to expand its operations through acquisitions. The company should also ensure that it uses the best strategy to sell its shares in order to raise the required capital and at the same time satisfy all its stakeholders in order to remain competitive even after privatization.

The action-based strategy is the best option that AVG Company should embrace when offering its IPOs as the process entails lesser expenses than the traditional IPO method. In addition, the auction-based strategy gives all interested investors an opportunity to participate in this process which increases customer royalty to the AVG Company.

Reference List

Ansoff, L. (1963). Corporate Strategy. New York: McGraw Hill Publishers.

AVG Technology (2012). AVG technology announces filing for proposed IPOs.. Retrieved from https://www.avg.com/en-ca/homepage#pc

Carter, A. (2005). Morningstar follows Googles lead. Web.

Weinraub, H. & Donovan, E. (2007). Google and Morningstar IPOs: Incentives for the Dutch auction Process. New York: Prentice Hall.

The article explains that most studies about initial public offering (IPO) are conducted in the US context. Promoting a successful IPO is a goal for many business organizations to attract institutional investors and improves stock exchanges. The author recommends integrating new aspects of financial strategies like informational asymmetries, rightful ownership, and venture capitalism into the discourse. Despite the intention to examine the IPO market world, certain failures emerge and bother leaders and managers. The article introduces a critical review of academic literature to find out how finance executives should make helpful public decisions. The IPO process is determined by a proper understanding of such factors as ownership and the level of control, intermediates who participate in investment activities, effective pricing, and the quality of the information in management.

In the article, several strategies to reduce unnecessary data asymmetry and underpricing are concluded. For example, organizations should be ready to go beyond the corporate governance requirements to satisfy investors. Another recommendation includes the background of low floating charges, which allows lessening underpricing. Although the study covers a broad topic and approaches to improve the financial situation and IPO processes, there is an evident scope for future work about valuation, pricing, and institutional investments. I think that the author succeeds in explaining the main idea of IPO firms and market factors that play an important role in decision-making. However, it is hard to see a clear plan in terms of which specific improvements may be achieved at the moment. Therefore, this article may be a solid background for a new study but remains a limited source of information about pricing issues and the correct institutional investment outcomes.

The author is interested in discussing the reasons for the long-run performance of IPOs. Firstly, price patterns create new opportunities for trade strategies in order to promote effective returns. Secondly, market prices can be changed due to informational efficiency. Finally, it is hard to control all IPO processes over different periods of time. There are certain time- and industry-dependent factors that do not make it possible for companies to perform IPOs properly. The author believes that some bad luck should not be ignored and chooses the long-run IPO underperformance as a phenomenon for the current study to elucidate the peculiarities of the investors’ work. A 3-year experience with 1,526 IPOs between 1975 and 1984 was described in the article. There were five criteria (offer price, gross proceeds, offering, company, and investment banker) to include a process into analysis and two measures (cumulative average and buy and hold returns) to evaluate performance.

One of the main results is that the cumulative average adjusted return is about -30% and should be adjusted to different benchmarks like the NASDAQ index or Amex-NYSE index. Besides, the industry where a company offers its services and its size also affects the quality of performance. The author discovers that organizations with small growth may not face a serious cost of equity capital and achieve more successful outcomes with time. There are so-called windows of opportunity that managers create to rush to the market and set optimistic expectations. Unfortunately, several issues were not properly resolved in the article. For example, the author did not describe a tendency according to which the underperformance occurred. Most findings were general and based on the opinions of other authors, limiting the worth of original research. I find the empirical evidence of the study as weak because the causes of high initial returns are not clarified in a clear way.

Many entrepreneurs and researchers pay much attention to the evaluation of IPOs and the returns for investors under different conditions. In this article, the authors focus on the conditions under which firms decide to go public and participate in the battles of investors. Each time, a new organization has to deal with several tasks. First, it is necessary to succeed in pricing the IPO because investors have limited knowledge about the company and its efficiency and cannot predict the changes in prices before and after the stock. Another problem touches upon the trading price and the impossibility of learning what financing may be required. The last concern is about the content that becomes available to all investors with time. Underpricing results vary in companies, and this article investigates the peculiarities of Canadian organizations and their IPO pricing policies and long-term performance.

One of the vital strengths of the current study is using empirical evidence from publicly available information. The review of the literature is a common method to answer the main research question about what defines the quality of IPO performance. The authors recommend two methodologies: Ritter’s arithmetic approach (IPO returns consist of cumulative abnormal returns and benchmark portfolio returns) and the wealth creation/depletion geometric approach (invest in benchmark portfolios). Still, I notice such shortages the failure to analyze an existing variety of explanations of underpricing and no theoretical framework. A lack of this information and a small sample size challenge the Canadian results. Identifying two appropriate methodologies to examine IPO processes in Canadian organizations and explaining the value of IPO status help the reader define another credible perspective about hot IPO markets. The article relates to other studies as it contributes to understanding the reasons for raising equity capital and exit mechanisms owners might use for harvesting investments.

In this article, the author admits that the relationship between IPO valuation, price support, and returns has been poorly investigated, with only one theoretical explanation that underwriters can use high prices only with approved laddering. Therefore, the goal is to extend the approach and use more companies that go public. There are two main hypotheses in the study: to prove that price support IPOs decline in short-term returns and to demonstrate a negative connection between price support and returns. The chosen sample included 114 organizations in Turkey, and their information was obtained from the regulatory authority, the Capital Markets Board (SPK). Price support data was gathered from post-issue material to formulate a hand-collected report. Several statistical tests were developed to analyze the relationships between the chosen variables. The standard event methodology was implemented to create formulas for the cumulative abnormal returns and market-adjusted buy-and-hold returns.

Using multivariate regression models, the author proved that price support performs the function of valuation bias. In addition, it was shown that IPOs that implement price support have lower initial returns and higher valuation bias compared to IPOs without price support. This valuation bias increases the necessity of promoting price support and controlling selection bias that may be related to offering price. Although the study could serve as a solid contribution to recognizing the worth of underwriters’ valuation and price support, the goal of expanding the theoretical framework is poorly recognized. Price stabilization has potential for primary and secondary investors, regulators, and some market players, but researchers could not find enough material about why IPOs are constantly overvalued in short-term returns. Anyway, I consider this study significant empirical evidence for IPO pricing strategies.

Twitter

The company is based in the United States. It was formed in 2006. The company operates in the internet industry. The initial public offering of the company was made on 7^th November 2013 at $26 per share. The company offered seventy million shares during the initial public offering. The graph presented below shows the share prices of the company between 6^th November 2013 and 23^rd December 1999.

The graph shows that there was an increase in the share price of Twitter immediately after the initial public offering. Thereafter, there was no change in the share price of the company for some period followed by a significant increase. The graph presented below shows the returns of the shares.

There was a significant increase in returns from the shares a day after the initial public offering. Therefore, the returns were stationary around the x-axis.

Google, Inc.

Google, Inc. is an American-based multinational company that was formed in 1998. The company operates in the internet, computer software, and telecommunication equipment industry. Initially, the company was privately owned. It went public on 19^th August 2004. The company offered over nineteen million shares at a price of $85 per share. The graph presented below shows the share prices of the company between 19^th August 2004 and 30^th September 2006.

The graph shows that there was a continuous increase in the share price of the company two years after the initial public offer. It implies that the shareholders received a significant amount of return by investing in the shares of the company. The graph presented below shows the returns of the shares.

The returns of the shares for Google, Inc. were stationary during the period. The return oscillated around the x-axis. Further, it can be noted that there was a general increase in the share prices.

LinkedIn Corporation

The company was formed in December 2002. LinkedIn Corporation is based in America. The company trades on the New York Stock Exchange and it operates in the internet industry. The shares of the company were first traded on 19^th May 2011 at a price of $45 per share. The graph presented below shows the share prices of the company between 19^th May 2011 and 23^rd December 2013.

There was an increase in the share price of the company at the close of the first day of trading. Thereafter, the share price declined. It can be observed that there was a slow growth in the share prices between the date of the initial public offering and 2012. During the period, the shareholders received a small number of returns from their investment. In 2013, the company experienced a significant increase in share prices. The graph presented below shows the returns of the shares.

The returns of the shares for LinkedIn Corporation were stationary during the period. The return indicates a general increase in the share prices for the company.

Amazon.com, Inc.

The company is based in America. It was formed in 1994. The company trades on the internet and the online retailing industry. The initial public offering of the company was made on 18^th May 1997 at $18 per share. The graph presented below shows the share prices of the company between 18^th May 1997 and 30^th June 1999.

The graph indicates that the share price of the company remained fairly constant in the first two months of operations. Thereafter, the company reported a slow rate of increase in share prices. Two years after the initial public offering, the share price of the company had risen significantly to about $125. The graph presented below shows the returns of the shares.

The graph above indicates that the returns of the company were stationary. There was no trend displayed in the returns.

Facebook, Inc.

Facebook, Inc. is an American-based company that was formed on 4^th February 2004. The company operates in the internet industry. Initially, the company operated within the United States. It later expanded its operations to other parts of the world in 2005. Facebook, Inc. went public on 18^th May 2012. The company raised about sixteen billion shares through the initial public offering. Each share was offered at $38. The graph presented below shows the share prices of the company between 18^th May 2012 and 24^th December 2013.

The graph above shows that the share prices of the company traded below the initial public offering price for one year and two months. The share prices thereafter started to increase in July 2013. This may be an indication that the share prices of the company at the initial public offering were overstated. The graph presented below shows the returns of the shares.

The graph above indicates that the returns of the company were stationary. There was no trend displayed in the returns.

Saudi Kayan Petrochemical Company

The company was formed on 11^th June 2006. It went public on 23^rd June 2007. The shares were offered at SR12 per share at the initial public offering. The graph presented below shows the share prices of the company between 23^rd June 2007 and 24^th December 2014.

After the initial public offering, there was no change in the share price during the first four months of trading. The share prices increased and later declined in 2008 and 2009. The decline shows a reduction in the returns received by the shareholders. The graph presented below shows the returns of the shares.

There was no trend displayed in the returns. There was no consistent increase or decrease in the returns.

Dar Al-Arkan Real Estate Development

The company deals with property development. It was formed in 1994. The company carried out its operations as a private limited liability company. It raised capital through private placements. It went public on 29^th December 2007. Each share was offered at SR40. The graph presented below shows the share prices of the company between 29^th December 2007 and 30^th December 2009.

The shares of the company did not perform well after the initial public offering. It may be an indication that the share prices were overvalued. It may also indicate that the shareholders incurred losses after the initial public offering. The graph presented below shows the returns of the shares.

The graph shows that the movements of the share prices were below the x-axis. It implies that the share prices declined over the period.

Prince Al Waleed’s Kingdom Holding Company

The company deals with a variety of investments. The key interests are in entertainment, real estate, and banking. The company was formed in 1980 and it went public on 29^th July 2007. Each share was offered at SR22.95 during the initial public offering. The graph presented below shows the share prices of the company between 29^th July 2007 and 29^th July 2009.

From the graph presented above, there was an overall decline in the share prices of the company after the initial public offering. This implies that the shareholders incurred losses in their investments. The graph presented below shows the returns of the shares.

The graph shows that the returns on shares were negative.

Jabal Omar Development Company

The company went public on 1^st December 2007. The graph presented below shows the share prices of the company between 1^st December 2007 and 1^st December 2009.

The share prices increased after the initial public offering. Thereafter, they declined. It indicates a loss to the shareholders. The graph presented below shows the returns of the shares.

The graph shows that the investors received a minimal amount of return from their investment.

Mobile Telecommunication Company Saudi Arabia

The company went public in 2008. The graph presented below shows the share prices of the company between 22^nd March 2008 and 22^nd March 2010.

The graph presented below shows the returns of the shares.

The graph for shares and returns show a decline in the value of shares after the initial public offering.

The above analysis indicates that the share prices increase after the initial public offering. The increase is followed by a decline in the share prices for a long period. The share prices for companies based in America increases gradually two years after the initial public offering while the share prices for companies based in Saudi Arabia declined within the first two years after the initial public offering.

For some developing organizations, “going public” is more than offering stock. The event reveals the firm’s growth and performance. In the event that an organization needs to offer stock shares to the overall population, it directs an IPO. A listed company becomes a shared conglomerate with multiple shareholders. However, a listed company must adhere to the market regulations as approved by the Securities and Exchange Commission (SEC). However, it is different from initial public offerings (IPO).

The underwriter and the SEC influence the procedure for an initial public offering. However, the company determines the duration of an IPO. As a result, the principal offer of stock to the general population of a privately owned business has been a definitive objective for entrepreneurial businesses. An IPO cannot give an organization access to funding to improve development and liquidity for originators and financial specialists; however, it gives informal approval. With a goal to pick the advantages of raising capital and accomplishing more, organizations must be settled and ready to pass harder administrative prerequisites. Companies providing public offers pay more than $2 million to cover a large group of expenses, which include legitimate bookkeeping, printing, posting, recording, financier rebate, and commission of 7 percent of the offering.

The organization and its guarantors cooperate to make sense of how the IPO ought to be valued. Since the stock has never been exchanged, it is difficult to foresee how it will be sold. There are a few variables that can offer assistance decide interest for the stock and its potential future exchanging movement.

To decide the IPO value, guarantors and the organization will regularly take a gander at an assortment of components including:

• The number of shares offered in the IPO.
• The configuration of the private enterprise.
• The prospective development of the organization.
• The productivity of the organization’s plan of action.
• The present stock cost of listed organizations.
• The pattern of the security exchange commission.

Consequently, the organization’s history, items, administration, and notoriety are elements that influence the IPO cost. Notwithstanding the monetary figures, an organization’s story can likewise affect the IPO cost. These elements are utilized to decide the evaluated IPO value range, which is incorporated in the preparatory plan. The preparatory outline is a piece of the enrollment proclamation, which has been recorded with the SEC in an arrangement to offer stock to the public. By implication, the preparatory outline is used to decide enthusiasm for the IPO. If an extended deal is arranged, the base cost declared on the main day of the open offering will be utilized as the stock price in the offering proceeds. A firm conducting the first sale of stock (IPO) needs a public presentation, which determines the stock value. There are a few strategies accessible for stock valuation.

The methods of stock pricing in IPO

We will depict the three IPO evaluating techniques. In a public offer, shares are evaluated when an agreement is reached with the underwriter. In book-building strategy, there are assortments of practices that influence the stock value in an IPO. The venture or investment bank will choose speculators to concentrate data about the need for shares and the value financial specialists will offer before setting the offer cost. As a result, financial specialists submit offers, and afterward the venture bank costs and designates the stock value in accordance with the SEC guidelines. The book-building strategy has the conspicuous fascination of molding the last issue cost on request conditions. In book-building offerings, the venture bank gathers speculators’ signs of premium, and afterward extracts circumspection in the valuing and distribution of the securities. The venture bank must assemble data in setting the value range preceding the opening event. Consequently, the venture bank sets the stock cost by the public offer. The public offer or the settled cost is another method investor’s request with value revelation occurring for the most part in the secondary transaction. Thus, the fixed pricing technique has been substituted for the primary strategy of stock valuation. The auction process is the third technique for stock valuation. Bidders need to present their interest plans during the auction process. The salesperson picks the most noteworthy cost such that total uncovered interest parallels supply.

The value rebate is promoted in the guarantor report. The financier gathers data about financial specialist interest for the offers. This new data is utilized to modify the preparatory offer cost to arrive at the stock value. A plan is drafted which contains, amongst different things, budgetary data about the organization and the terms of the offer.

Stock costs are dictated by coordinating the purchase and offer requests. Every purchase request is an offer to purchase a certain number of shares at a specific cost. Every offer request is a proposal to bargain a certain number of shares at a specific cost. The cost of any stock is dictated by finding the cost at which the extreme number of shares will be executed. This procedure is preceded repeatedly amid transaction hours and the reseller’s price.

A bank or gathering of banks sets up the cash to finance the IPO and “purchases” the shares of the organization before they are recorded on a stock trade. The banks have their benefit on the effect in cost between what they paid before the IPO and when the shares are formally offered to the public. Please note that banks engage in fierce marketing strategies to increase profits during the IPO.

To attempt and rustle up enthusiasm for the IPO, the investment bank displays and exhibits the plan to financial specialists. This process is called ‘road stunt’ because it involves rad trips, group presentations, and web discussions. This procedure is called IPO distribution. Street shows target large conglomerates like pension institutions as opposed to individual speculators. The investing bank provides details of the company prior to the IPO date. Please note that the process influences the value of the stock. The framework relies on the organization, the accomplishment of the road stunt, and current economic situations. Thus, the contracting bank, its road stunt, and marketing influence the stock value. The financer conducts a roadshow, exhibition, and visual presentations during the IPO. The event determines the value of the stock. By implication, the process could prompt even more exchange and future business from different IPOs. There is likewise the distinction of having a celebrated organization recorded with the commission. Trades make pitches to the organization that approves the final selection. By implication, the organization makes the final selection before going public. After the organization and venture bank consent to a bargain, the bank assembles an enrollment articulation to be recorded with the SEC.

Firms conduct initial public offerings as a strategy to raise the money needed for growth and expansion. Initial public offerings can either involve tradition IPO as well as Auction-based IPOs. In traditional IPOs, companies that aspire to go public engage an investment bank that helps them to underwrite an IPO. The investment bank works together with the firm in researching for the probable market value of the firm.

Depending on the amount of money the firm requires in its growth and expansion, the investment bank and the company determines the value of the share as well as the number of shares the company will offer in order to raise the required capital.

After determining the true market value of the company, the company and the investment banks discounts the estimated market value of the share in order to get the value at which the company will sell its shares. Once the company determines the share price as well as the number of shares to be offered, the firm and the investment bank approaches large investors such as wealthy individuals as well as institutions with the proposed shares.

The institutions and people who are mainly approached by the investment banks are its most royal customers as well as the wealthy group. Subsequently, interested investors commit to purchase some shares at the price given. After the road show process, the investment bank together with the concerned company reviews the investors’ commitments and subsequently allocates them the amount of shares they had pledged to buy.

The investment bank benefits from a certain percentage of the IPO sale as a commission as well as from other fees charged from underwriting the IPO. Consequently, those investors who have been allocated shares start selling their shares on the initial day of trading (Ansoff, 1963).

Auction-based IPOs is an alternative method used by companies in the privatization process. This method entails availing the IPO to a larger set of prospective investors. In this method of IPOs the firm establishes an investment bank that underwrites the IPO at low cost. Firms determine the cost of the shares as well as the amount of shares they will offer.

The road show flows to educate potential investors about the company without allocating the shares. After this stage, the company opens the bidding of the shares and interested investors place their bids as well as the number of shares they are interested in purchasing.

The most common format of auction –based IPO is the Dutch format where the company sets the price above any possible price that any investor is likely to bid for and reduces the price depending on the value of the bids. This process is repeated to other bidders until all the shares have been sold. After selling all the shares, the bidders then pay for their shares at the price that is offered by the final bidder (Weinraub, & Donovan, 2007).

The AVG Company should carefully consider the best strategy to adopt in its privatization process when offering its IPOs (AVG Technology, 2012). The company has two options to consider from; the first one is the tradition IPO method that entails using an investment bank to underwrite as well as allocate shares to potential investors who are mainly the wealthy people as well as institutions that are committed to the investment bank.

The second one is the auction-based IPO that involves availing the shares to a large set of prospective investors by making the allocation of shares open to all interested parties through the bidding process. However, the traditional method of IPOs is not the best strategy for AVG to consider adopting in its privatization process. This is because the option involves high costs to implement.

As a matter of fact, the investment bank that the company employs to underwrite and allocate shares charges a lot of money in terms of fees paid. Another reason why AVG should not opt for the traditional IPO method is because this method involves allocation of shares to few investors at a discounted rate which makes the investors to attain more shares at a much lower price than the actual market price of the share.

Therefore, during the first trading day, the few investors who are allocated the shares sell them at a much higher price because they are limited to a few investors and were allocated at a discounted price. This makes the investors to make a lot of money at the expense of the company that is offering IPOs in order to raise capital that it requires to expand.

The Auction-based IPOs has a disadvantage of not courting institutional investors through allocation of shares at a discounted rate. This is argued as one of the factor that can negatively affect the future performance of the company that adopts auction-based IPOs as it does not attract enough investors to bring an overall capitalization that is greater than that previously owned by the private entity.

Nevertheless, the buying potential of small scale customers should not be undermined and thus, AVG Company should go ahead and offer the auction-based IPOs despite being cited not to have been a very successful option for the Morningstar.

However, the auction-based IPOs worked very well for Google which because Google had established its brand well before going public. Therefore, AVG Company is likely to succeed like Google if it uses auction-based IPOs option since it has already braded well (Carter, 2005).

For these reasons, the AVG Company should opt for the Action-based IPOs instead of the traditional IPO strategy. One of the reasons why it should opt for the auction-based option is because of the economic benefits is has on the company offering the IPOs. The auction-based IPOs allocate the shares at a price close to the market price.

Thus, the increase of the share price during the first day of trading is minimal meaning that most of the profits end up with the company rather than the investors. In addition, there are fewer costs that are associated with this process which makes it more economical for AVG as compared to the traditional IPO option.

Moreover, the overall costs associated with auction-based IPOs are lower because in action-based IPO, the investment bank just requires minimal fees for underwriting the IPO, but it does not charge extra fees as commissions from the sale of shares as the case with the traditional IPO method that charges a commission that ranges from a ratio of 2.2% to 7% for smaller firms.

Another reason why AVG Company should opt for the auction-based IPO method is because of its ability to express its royalty to all its customers. The auction-based IPO process gives all the stakeholders within the company an opportunity to participate in the bidding process in order to enable them to be allocated shares.

This method will ensure that all the investors who are willing to buy AVG shares place their shares when the firm avails its shares online for bidding. Through this process, many customers will become royal to the company as they will realize that they are highly appreciated and valued by the AVG management regardless of their buying capacity.

This attitude is likely to benefit the AVG Company greatly in the long run as all its customers will continue buying its services as a result of their un-discriminatory aspect of the company (Weinraub, & Donovan, 2007).

Since the AVG Company is considering undertaking an important move of privatization in order to raise the capital, it needs to expand its operations through acquisitions. The company should also ensure that it uses the best strategy to sell its shares in order to raise the required capital and at the same time satisfy all its stakeholders in order to remain competitive even after privatization.

The action-based strategy is the best option that AVG Company should embrace when offering its IPOs as the process entails lesser expenses than the traditional IPO method. In addition, the auction-based strategy gives all interested investors an opportunity to participate in this process which increases customer royalty to the AVG Company.

Reference List

Ansoff, L. (1963). Corporate Strategy. New York: McGraw Hill Publishers.

AVG Technology (2012). AVG technology announces filing for proposed IPOs.. Retrieved from https://www.avg.com/en-ca/homepage#pc

Carter, A. (2005). Morningstar follows Google’s lead. Web.

Weinraub, H. & Donovan, E. (2007). Google and Morningstar IPOs: Incentives for the Dutch auction Process. New York: Prentice Hall.

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.

Introduction

Investors are interested in the post-IPO performance of companies, and they consider various factors when making a pre-IPO judgment about investing in new stocks. When IPO is finished, firms may encounter a situation referred to as underpricing, which means that the stock price of the issuing firm declines after the first-day closing. The board structure is one of the determinants of post-IPO performance.

The characteristics of the firm’s board include the number of board members, independent directors, experience, presence of woman directors, and others. In the current study, the number of board directors is considered and its effects on IPO underpricing are investigated. There have been many types of research, as discussed in the literature review, which gives conflicting results regarding the impact of board size on IPO underpricing that is also explored in this study. The research question set for this study is: does board size affect IPO underpricing?

Literature Review

Initial Public Offering (IPO) is the first-time launch of a firm’s stocks on an exchange to institutional and retail investors. The IPO is underwritten by a financial institution and its pricing is based on the financial valuation of the firm (Dolvin & Kirby, 2016). IPO underpricing refers to the situation when the stock price falls below the first-day level in the post-IPO period (Dolvin & Kirby, 2016). If a firm experiences underpricing, then it can adversely affect shareholders’ confidence and there could be a flight of capital.

The theoretical framework of the current study is drawn from the signaling theory that states that firms need to send positive signals to market participants, including investors, to show their worth and prospects. A firm with a small board size is viewed positively by investors because they believe that decision-making in such a company is easier and quicker, which is necessary for business growth (Sriram, 2018).

On the other hand, Johl, Kaur, and Cooper (2015) concluded that a larger board is viewed positively by investors as they see it as a way of acquiring more resources. As noted earlier, the signaling theory is suggestive of a positive association between board size and IPO underpricing based on the underlying assumption that the board size represents or “signals” a firm’s quality to investors. A general perception can be established that a large board size would have a positive influence on the IPO underpricing.

However, empirical evidence does not support this assumption in every case. The researchers have also concluded a negative association between board size and IPO underpricing. Thus, the relationship between the board size and IPO underpricing has been identified by researchers in the past as both negative and positive.

Sahoo (2014) argued that a large board size and board committees facilitate better monitoring and reporting of business activities that reduce information asymmetry. The result of their study of 176 Indian IPOs concluded that the relationship between board size and IPO underpricing is positive, which implies that investors view firms with a large board size to be using significant resources that might hinder business growth. Furthermore, firms’ board size was found to have a positive relationship with post-listing price volatility and rate of subscription.

Moreover, Singh and Maurya (2018) argued that board size is an independent measure of corporate governance. The study conducted by Malafeev (2018) focused on understanding the impact of board size on IPO underpricing and came up with a conclusion that there exists a negative relationship between them.

Another study by Anand and Singh (2019) provides a comprehensive understanding of the nature of the relationship between board size and IPO underpricing. It conducted that there is a negative relationship between the two variables. Similar conclusions have been reached by Dolvin and Kirby (2016) in their study as they found an inverse relationship between the number of directors on the firm’s board and IPO underpricing.

Apart from these findings, there are a few studies in the past that could not determine a significant association between these two variables. Kubicek, Stamfestova, and Stouhal (2016) carried out their research to understand how board ownership and IPO returns are linked with each other. In doing so, they were able to conclude an insignificant relationship between board size and IPO underpricing. A study by Kubíček, Strouhal, and Štamfestová (2017) hypothesized a negative relationship between board size and IPO underpricing and failed to find evidence for it among a sample of 75 IPOs in Central Europe.

Other studies, in this regard, were conducted by Mehorta (2016) and Mishra and Kapil (2017). They studied the relationship between IPO and board governance and considered board size among other variables. The test between the variables was based on the data of IPO firms operating in India. The researchers noted in their study that IPO firms do not have access to the necessary resources and also face problems in establishing their brand name in the market which is critical to the success of their operations.

In this context, the researchers referred to the resource dependence theory based on the rationale that IPO firms are relatively new in the market and have a significant dependency on the resources available in the market. Loughran, Ritter, and Rydqvist (2016) have noted that having a larger board size results in low underpricing and it is considered favorable in the long run for IPO firms. Furthermore, the study by Mahatidana (2017) concluded a negative association between the variables, and they noted that when the board size of a firm is large, underpricing can be expected to be lower.

Hypothesis Development

There has been a lot of research including Sriram (2018) and Dolvin and Kirby (2016) indicating that small board size is favorable and has a positive impact on the post-IPO performance of firms. However, others, including Johl et al. (2015) and Sahoo (2014), suggest that large board size is favorable. The literature discussed in this section provides three different views about the impact of board size on IPO underpricing including (1) inverse relationship; (2) direct relationship; and (3) no relationship. The current study focuses on the first view that there is an inverse relationship between the two variables. The hypothesis drawn from the review of previous studies, including Malafeev (2018), is presented in the following:

H: IPO underpricing is negatively associated with the board size.

It implies that the expected outcome of the statistical test is a negative coefficient of the slope between board size and IPO underpricing. The significance of this relationship is also assessed by comparing the p-value with the alpha value of 5% at the assumed confidence level of 95%.

Research Method

The current study follows the positivist paradigm to carry out quantitative research that aims to test the relationship between board size and IPO underpricing. The deductive approach used in this study sets up a hypothesis for testing this relationship through mathematical validation. The study performs multivariate regression analysis to develop a model that predicts changes in the values of the dependent variable affected by four variables.

Where, ε1 = Error Term

The dependent variable is LNUNDERPRICING which is the natural logarithm of underpricing fraction which is calculated as follows:

The independent variable is LNBSIZE which is the natural logarithm of the number of board members in a firm. There are three control variables also included in the model, which are LNASSETS, BIGN, and AUDCOM. LNASSETS is the natural logarithm of total assets value recognized on the proforma balance sheet of an IPO firm. AUDCOM is a dummy variable representing the absence (0) or presence of an audit committee (1). BIGN is also a dummy variable that has two values 0 and 1 representing the non-employment and employment of an external auditor from Big 4 accounting firms.

The sample size is 50, which is selected by using a random sampling technique (Creswell & David, 2017). The sample includes firms belonging to different industries, excluding financial and real estate sectors. These firms launched their IPOs on the Australian Securities Exchange (ASX) during five years from 2009 to 2013. The data of these companies is shown below.

Table 1. IPOs on the Australian Securities Exchange.

Results and Discussion

Table 2 indicates that the mean value of underpricing fraction is 0.062, which means that the selected IPOs were underpriced by 6.2%. The median is less than the mean value, which implies that the data is right-skewed. The standard deviation (SD) is high which means there is a significant dispersion in the sample data. The sum of LNUNDERPRICING is 1.838 which implies a high level of underpricing recorded in the sample data. The minimum and maximum values are -0.40 and 1.0, which indicates that the range is 1.40. The mean value of board size is 4.260, and its standard deviation is also high.

Table 2. Descriptive Statistics.

The goodness of fit is weak as the value of R-square is just 0.055, which implies that the model only explains 5.5% of the total variations given in Table 3.

Table 3. Regression Results.

The regression equation obtained from the analysis is given below:

• LNUNDERPRICING = -0.002988727 -0.084463378 * LNBSIZE + 0.013105743 * LNASSET -0.088534243 * BIGN – 0.07967028 * Audit Committee

The coefficient of the slope between LNUNDERPRICING and LNBSIZE is negative, which implies an inverse relationship. However, the p-value is not less than α = 0.05, which means that this relationship is not found to be significant. Furthermore, the coefficient of the correlation between LNUNDERPRICING and LNASSET is positive that implies a direct relationship. This relationship is also not found to be significant. The coefficients of the correlation between LNUNDERPRICING and BIGN and Audit Committee are also negative that implies indirect relationships between them which are found to be insignificant.

Conclusion

The current study empirically investigated the effects of board size on IPO underpricing by statistically estimating the coefficient of the relationship between them. The results confirm that there is an inverse relationship between board size and IPO as the coefficient of the slope is negative. It implies that firms with large board sizes experience a decline in their post-IPO stock price.

Therefore, the hypothesis set out for this relationship is accepted. This finding also supports conclusions of previous studies, including Sriram (2018) and Dolvin and Kirby (2016). In this way, the robustness of the current study’s results is asserted. However, the relationship between board size and IPO underpricing is not significant, as the p-value was less than the alpha value at the confidence level of 95%.

Moreover, the results show that the size of a firm positively affects IPO underpricing, which is similar to the findings of studies including Mahatidana and Yunita (2017). The existence of an audit committee in the firm launching an IPO on the capital market and its accounts being verified and submitted by one of the Big 4 accounting firms have a negative relationship with IPO underpricing. These findings are inconsistent with studies by Green and Homroy (2018), Mahatidana and Yunita (2017), and Singh and Maurya (2018).

Limitation of Study and Future Research

A key limitation of the regression model implemented in this study is that the values of R-squared and Adjusted R-squared are very low that could imply poor predictability of the dependent variable based on the changes in the values of independent variables. The outcome is that no significant relationship between variables was found. There are several possible reasons for this outcome including a highly diverse sample of selected IPOs, a small data sample, and the presence of data outliers. It could be improved in future studies by selecting IPOs in the same sector and analyzing a larger sample of data.

References

Anand, R., & Singh, B. (2019). Do firm- and board-specific characteristics corroborate underpricing? A study on the Indian IPOs. Management and Labour Studies, 44(1), 86-102.

Creswell, J., & David, J. (2017). Research design: Qualitative, quantitative, and mixed methods approaches (5th ed.). Thousand Oaks, CA: Sage Publications.

Dolvin, S. D., & Kirby, J. E. (2016). The impact of board structure on IPO underpricing. The Journal of Private Equity, 19(2), 15-21.

Green, C., & Homroy, S. (2018). Female directors, board committees and firm performance. European Economic Review, 102, 19-38.

Johl, S. K., Kaur, S., & Cooper, B. J. (2015). Board characteristics and firm performance: Evidence from Malaysian public listed firms. Journal of Economics, Business and Management, 3(2), 239-243.

Kubíček, A., Strouhal, J., & Štamfestová, P. (2017). Impact of board structure on IPO underpricing in Central Europe. International Advances in Economic Research, 23, 129-130.

Kubicek, A., Stamfestova, P., & Stouhal, J. (2016). Cross country analysis of corporate governance code in the European Union. Economics& Sociology, 9, 319-337.

Loughran, T., Ritter, J. R., & Rydqvist, K. (2016). Initial public offerings: International insights. Contemporary Finance Digest, 2(1), 165-199.

Mahatidana, M. R. A., & Yunita, I. (2017). An examination factors influencing underpricing of IPOs in financial and manufacturing industries on the Indonesia Stock Exchange over the period of 2011- 2016. International Journal of Scientific and Research Publications, 7(11), 457-502.

Malafeev, A. (2018). Relationship between characteristics of board of directors and IPO underpricing. Web.

Mehorta, S. (2016). Accentuating role of board for corporate governance in listed Indian companies. International Journal of Business and General Management, 3(2), 47-56.

Mishra, R., & Kapil, S. (2017). Effect of ownership structure and board structure on firm value: Evidence from India. Corporate Governance: The International Journal of Business in Society, 17(4), 700–726.

Sahoo, S. (2014). The impact of corporate board structure on the pricing performance of initial public offerings. The IUP Journal of Applied Finance, 20(4), 22-47.

Singh, A. K., & Maurya, S. (2018). Corporate governance, ownership structure, and IPO underpricing: Evidence from the Indian new issue market. Journal of Research in Capital Markets, 5. 7. Web.

Sriram, M. (2018). Board characteristics and firm performance: A study of S&P BSE Sensex in India. Afro-Asian Journal of Finance and Accounting, 8(3), 336-349.

Introduction

The case is about the international company Citrus Glow, which is facing a problem pertaining to the valuation of the company for the issuance of an initial public offering (IPO) in the market to increase the capital structure of the company. The Citrus Glow International is a company which launched the completely organic orange based cleaning agent by the name of ‘citrus glow’ into the market. The company has since its initiation, increased its portfolio to include detergents, and cleaners for se in home as well as industrial places. The paper highlights the different techniques that can be used to value the company for an IPO and discusses the advantages and disadvantages of the specific approached. The benefits of using an IPO to increase the capital structure of the company are also provided.

Situation

The situation that is presented in the case is that the company Citrus Glow International has grown considerably since its inception in 1984. Now in order to operate in the market and compete against the competitors who have started launching similar products as manufactured by Citrus Glow International into the market, the company needs to increase its capital structure to support the growing business and the expanding scale of its operations.

Analysis

Citrus Glow International is interested in going for an IPO. The reason behind it is that an IPO will enable the company to go public. By going public Citrus Glow International would benefit financially with an increased capital financing. This increase in the capital can be used by the company for research and development as well as for expanding the operations of the company to match the competition in the market. Moreover the public awareness of the company will also be increased as the IPO will generate publicity for the company. The main advantage that will be available to the company would be the increase in the market share of the company.

The increased operation as well as the increased resources of the company will enable it to reach to the people in the market who previously either were not aware of the product or did not have access to places where the product could have been bought. The disadvantages of the approach however pertain to increases rules and regulation that company will have to comply with the state, and the increase scrutiny which would be placed on Citrus Glow International. Additionally disclosures will have to be made for the investors in the business through the SEC Act of 1934. Financial reporting documents as well as investor relation departments would also need to be launched by the company which can increase the costs for the company through the Sarbanes Oxley Act.

The valuation model used by Lisa is the Corporate Valuation Model by which the company is values in terms of the present value of its free cash flows. Through this model the valuation of the company involves finding the market value by determining the present value of the company’s future FCFs. The market value is then subtracted form the debt of the company to come to the market value of the common stock for the company. The market valued common stock of the company is then divided by the outstanding shares to arrive at the stock price. This model is usually preferred to other models like dividend growth as it provides an estimate even when the dividend payout is unavailable or cannot be forecasted.

The price ratio model that is being considered by Dan is the approach by which the value of the company is determined by comparing the market value and the original value of the firm. The high value is taken as the value of the company which usually is the market value as this provides the most realist up to date valuation of the company. This approach is very easy to use however the main disadvantage of the approach is that there is very little information content and risk is not accounted for.

Conclusion & Recommendations

The Citrus Glow International Company should go for an IPO as this would greatly help the company in terms of competing with the substitute product manufacturing companies in the market as well as maintain the current position that they have in the mind of the consumer. The valuation of the company should be done on the basis which is most beneficial and realistic in terms of decision making and the long term objectives of the company.

References

Case: What are we really worth, Wallet, Wallet Cases in Mance, McGraw-Hill, 2^nd Ed.

For a company that is trying to expand into a new market, creating an initial public offering (IPO) may become the ultimate path to succeeding. According to Sorkhi and Paradi (2019), an IPO is “an event where a private company (an issuer) sells a portion of its authorised shares to the public investors for the first time” (p. 733). Therefore, the company will gain greater support from investors, which will allow it to establish itself firmly in the UK setting. Given the current competition rates among organisations in the milk production and selling business, financial assistance and extended relationships with local organisations that can provide support are essential components of success.

The advantages that an IPO provides to an organisation are quite substantial, For example, the financial support that a company receives once creating an IPO can be used to establish an effective infrastructure within the target market in order to build a highly efficient supply chain. In addition, the financial resources that an IPO will provide to a company include the opportunities for increasing the initial capital and expanding eh relationships within the UK market. Moreover, with the focus on stock options as one of the key competitive advantages that an IPO-based firm can offer, one will be able to create a highly functional HRM strategy for talent management. As a result, the current staff members will receive an opportunity to increase the extent and depth of their knowledge and prowess. In addition, options for professional growth will be provided (Brigham and Ehrhardt, 2016). Finally, with the rapid rise in the value of the company’s shares, it will become quite attractive to potential investors, thus increasing the amount of financial support received in the target economic setting.

However, an IPO also has several disadvantages that are worth discussing. For example, an IPO is likely to take a substantial amount of money and effort from company leaders. Indeed, sustaining IPO is a challenge that an organisation may fail to meet, especially in the context of modern economically challenging setting. Therefore, an IPO may become an excruciatingly difficult notion to support for a company, especially for small or medium entrepreneurship (SME). Moreover, as an IPO, an organisation is likely to attract close attention of regulators, which may entail multiple legal complications. Thus, it is critical for an organisation that decides to use the IPO approach in the UK to consider legal risks and threats of the target market. Another important disadvantage to remember is that the owners of the company cannot take a significant part of shares for themselves (lu and Derindere, 2019). The specified problem is linked to the fact that the IPO may entail a loss of ownership control, thus allowing the organisation to be managed by the parties that have a rather vague idea of its goals and capacities.

Overall, an IPO as a strategic choice has its advantages and disadvantages, yet it currently seems to be the most effective way of introducing an organisation into a new market. Despite the issues that this company may face, the use of an IPO will allow it to receive the needed support, thus gaining an opportunity to work on its competitive advantage and its representation in media to target customers. As a result, the business will find its customers and its place in the hierarchy of the selected market.

Reference List

Brigham, E. F. and Ehrhardt, M. C. (2013) Financial management: theory & practice (15th ed.). Boston, MA: Cengage Learning.

Lu, K. and Derindere, S. (2019) Valuation challenges and solutions in contemporary businesses. New York: IGI Global.

Sorkhi, S. and Paradi, J. C. (2019) ‘Measuring short-term risk of initial public offering of equity securities: a hybrid Bayesian and Data-Envelopment-Analysis-based approach’, Annals of Operations Research, 288, pp. 733–753. Web.