Foundations of Financial Management

Full Answer Section

 

• Disadvantages:
  • Can be more complex and time-consuming than traditional underwriting
  • May not be suitable for all IPOs

Traditional Underwriting

• Advantages:
  • More familiar and established process
  • Can be completed more quickly
  • May be less complex than a Dutch auction
• Disadvantages:
  • Can be less transparent and efficient pricing mechanism
  • Investors may not be able to bid the price they are willing to pay
  • Can lead to underpricing or overpricing

Real-Life IPO One real-life IPO that occurred in 2020 was the IPO of Snowflake Inc., a cloud-based data warehousing company. Snowflake's IPO was a Dutch auction, and the initial price was set at \$120 per share. The stock price on the first day of trading was \$192 per share, which was a 60% increase from the initial price. The stock price continued to climb in the following days, and it reached a high of \$240 per share on January 21, 2020. The stock price has since declined, and it is currently trading at \$129 per share. However, the stock price is still significantly higher than the initial price of \$120 per share. Conclusion Both Dutch auctions and traditional underwriting have their own advantages and disadvantages. The best method for an IPO will depend on the specific company and the circumstances of the offering. In the case of Snowflake Inc., the Dutch auction method was successful in generating a high initial price and a strong first-day pop. However, the stock price has since declined, and it is unclear whether the IPO was ultimately successful. Ultimately, the success of an IPO depends on a number of factors, including the company's financial performance, the overall market conditions, and investor sentiment.

Sample Answer

  Dutch Auction

• Advantages:
  • More transparent and efficient pricing mechanism
  • Investors are able to bid the price they are willing to pay
  • Can help to prevent underpricing or overpricing