Initial Public Offerings Essay
Initial Public Offerings
Primary private companies, who desires to go public or in other words decides to be listed in the different stock markets to raise capital, must first undergo a process called Initial Public Offering or IPO (Investopedia, 2008). This method has been widely popular and it goes to say it has its own shares of controversies as well. Especially from what was experienced during the 1990s on the dotcom crash, in which a lot of investors bought Initial stocks from companies even without a track record of operations and a feasible plan for profit (same as Investopedia, 2008). Now another Online firm plans to go public, it is the popular program Skype whose main features are online video and audio call conferencing.
This could be a good idea, from a sales standpoint since Skype has been earning revenues for its parent company Ebay even before the latter has decided to treat it as a stand-alone company due to its limited synergies with Ebay’s core activities which basically are Online commerce auction site and Paypal Online payments system (Stone, 2009).But if Skype will really go public, it could most probably used the same online method applied by former online firms: Google and Morning star which is the online auction approach.
This essay will attempt to justify the consideration of Skype to go public. It will also analyze what particular type of Initial Public Offering (IPO) it may apply. We will also go in detail to assess what type of investors that Skype would most possibly attract.
This study will also provide background on the lessons learned from previous online industries who went Public and used the auction approach as its method for IPO.As part of the types of methods for IPO offering, we will finally discuss potential costs and risks of each to have a better understand which method would be appropriate for a specific firm like Skpe.
Skype going Public
Ebay’s President and CEO could be right by the decision of treating Skype as a subsidiary company due to its function and future revenue potential if provided with the right amount of capital to work with.
Skype historically, has been a consistent top performer in terms of revenue generation since its early inception. From 2007, Skype posted a significant increase of 44% to a tune of $551 million, and segment market margins is at 21% which is also another big leap of 47% from 2007, and the projection of a total revenue for 2011 for $1 Billion dollars is not far fetch(ebay Inc., 2009), since the growth rate of Skype on its recent quarterly performance have been anything but slow. Just last October 2009 data Skype again has increased by another 41% in total registered users, which is in the $521 Million mark and growing, Its posted growth of 29% in revenues amounting to another $181 million dollars also confirms its status as a force to be reckon with on the Voice Over Internet Protocol (VoiP) industry (Schonfeld, 2009).
Direct competitors of Skype are Vonage and Net2phone although stable does not have the growth potential and massive customer base that Skype enjoys.
Skype has just also been sold recently by ebay to some private investors, and group led by Silver Lake partners, ebay sold 70% of its stake on Skype (Wauters, 2009).Which shows continued interest of the potential profit generation of this software. Skype is also considered as number ten on the Top ten potential IPO candidates by TechCrunch.com, given the rapid pace of Skype growth (Schonfeld, 2009).
Traditional or Online Auction Method for Skype’s IPO?
Skype may opt to apply the auction method, to have a lot of potential investors instead of limiting the opportunity to buy shares to a few large investing institutions, which possibly may not desire a new online firm.
Google used the same method, which is called the Dutch auction method in serving its IPO to the public, with a lot of potential risks in this kind of method Google still managed to pull it off successfully (Edmonston, 2009).
What type of Investors would go for Skype
Small and young investors may go for this firm if it went public, this group usually knows the boundless potential of the internet, and has some basic knowledge on the types of revenues tech stocks can produce. The emerging trend of young internet whiz kids, who have made fortunes using the net, may as well be the same characteristics of investors for Skype.
Conventional Investors, still requires a fundamentally sound metrics from a company that has a above average track records and has produced mostly tangible goods which some have been a staple of a society.
Lessons Learned from Online Auction Approach
Bothe Morningstar.com and Google used the same method for its Initial Public Offering, for the purpose of taking the controlling power away from the underwriters and to provide opportunities to invest for those who really believe and acknowledge a company’s potential. Both have been relatively smooth and successful. For Morningstar on its IPO last 2005 even when price analysts predicted that price of stock may be on the amount of lowest range projected of $16 to $19, the demand was really strong as it ended up on the marked price of $18.50 for the mutual fund and stock analysts’ online firm (Munarriz, 2005). Google however probably was overwhelmed by pressures of controversies induced by market analysts, financial scholars, other online competition and even the Securities and Exchange Commission, has decided for a last minute reduction of its target share price (Sorkin, 2009).
Online companies often face criticisms such as being overvalued or overhyped. Especially after the dotcom event, doubt of investors on whether they could really pull through some revenues and maximize shareholders’ equity is prevalent. Both Morningstar and Google have experienced those biases but took it in stride and have been relatively stable in the marketplace, despite contradictions.
Cost and Risks of each IPOs
According to a famous article by the Wall Street Journal regarding methods of IPOs, “Wall Street bankers compare auction IPOs with selling fine art on eBay instead of at Sotheby’s. The big Wall Street firms have good reason to defend the traditional model. Known as book building, it entails gauging the interest of hedge funds and mutual funds in an offering” (2005, p.2). This conventional model with its current fees of 7% of capital allows Wall Street companies to sell its IPO stock at discounted prices to their best customers, which could benefit them by taking profits if the IPO increased even on its first day of trading (Wall Street Journal, 2005 p.2).
Underwriters for this traditional approach receive a percentage of the IPO sale as commission, in addition to other fees or underwriting proceeds charged to underwrite the IPO.
Such examples of those fees according to Kamlet & Rini (1995)are:
• Manager’s Fee – Goes to the managing underwriter for negotiating and managing the offering. Amount:10% – 20% of the spread (meaning the spread between the Public offering price or POP and the underwriting proceeds).
• Underwriting Fee – Goes to the managing underwriter and syndicate members for assuming the risk of buying the securities from the issuing corporation. Amount: 20% – 30% of the spread
• Selling Concession – Goes to the managing underwriter, the syndicate members, and to selling group members for placing the securities with investors. Amount: 50% – 60% of the spread
These fees, almost selected investors and a potential of losing more capital by an increase in value on share price, especially when first day trading price of IPO rise for the company, has been the somehow the risks a company going public undergoes when applying this method.
As for the Auction Method, in which the firm sets a price of the share well above what any investor is expected to bid, and then reduces the price incrementally when an investor actually bids, has a relatively lower amount of fees. Risks involved according to some analysts is that IPOs develop pricing patterns similar to those exhibited by IPOs during the dot.com era, and whether it would really provide more efficient pricing (Hensel, 2005).
Risk of this mispricing can occur to lack of information on the part of the small investor, especially if the information issued could be implicit somehow to the small investor.
This study has discussed the strong possibility of Skype, joining the ranks of two famous Web companies such as Google and Morningstar, on going public. Skype have a rapid pace for growth based on its quarterly revenues and growing registered users. The best method for Skype to serve its Initial Public Offering is through an Online Auction, which again worked smoothly for both of the companies stated earlier.
Each IPO type has its own costs and risks. For traditional IPOs, banking on their solid foundation of book building, it has its drawbacks of high fees and profits for companies who went public especially if the share prices do well on the first trading day. For Online auction, although has relatively low fees compared to the traditional method, has also the risk of running into similar pricing patterns which has links with the dotcom mania that occurred not too long ago.
But for recommendation for Skype, the auction approach still works best, first to minimize cost on fees and a large possibility of fetching true market value stock price provided by potential strong demand due to Skype’s already significant business value.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 25 September 2016
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