Finance CASE 1

Running Head : FINANCE CASE 1

Finance CASE 1 : Morningstar 's Initial Public offering (IPO

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Introduction

An Initial Public Offering (IPO ) is the first sale of a private corporation 's stock to the public (How , J , and J . Howe 2001 . It is done with the aim of either raising money for investment or if a corporation is seeking to be publicly traded . There is usually a rush and mass publicity to register during this time . The first major decision a company makes are

p whether the company should or should not to go public and

If going public is the best move at that particular time

Dutch auction IPO is one of the best modern ways . It simply uses the internet and provides a fairer way of selling stocks . In traditional auction the prices rises until one bidder is left . In a Dutch auction the auctioneer sets an extraordinarily high price and lowers it until someone bids on the item . In theory buyers pay more for stock in Dutch auction IPO 's than ordinary IPO 's meaning that more money will go to the firm that is selling the shares . However , this traditional approach may be superior in the long run . The price spikes associated with a traditional IPO marks an impression of success to the stock which may in it self boost the stock further

Google and morning Star had successful IPO 's and were the first companies to use this approach (Dutch auction . Much of the analysis of Google 's IPO has concluded that the Dutch auction is a flawed way to float shares . This has been criticized by many experts in this area . If this approach is executed correctly it provides an efficient and effective mechanism that determines a share price where supply equals demand (Melissa B . Frye . 1999

There are various potential risks and benefits associated with a Dutch auction IPO which a chief financial officer should take into consideration before making use of this method to raise capital for his /her corporation

Potential benefits

Dutch auction IPO limits or removes the ability of the investment bank to influence the opening price of the shares and its ability to allocate IPO shares at all . The firm has its shares equality at its best . The traditional IPO system is characterized by investment banks which set the price for the IPO (and , of course , pricing it below the real market price to guarantee a first day explosion that the press likes so much - even though it means significant financial loss to the company ) and lets anyone bid on how much shares to pay , and then set the actual IPO price based on the highest price where all the company shares will set at Investment banks will come in , do some evaluative work on how much a company is worth , survey the market to determine the interest of potential buyers of a company at different price points and then recommend a pricing formula to the management...