Dutch Auction

Ahhh...leave it to the Dutch to do things in reverse order. Like...shoes are supposed to be soft and comfy, right? But no. They had to go with wood.

So...normally you’d auction a Van Gogh starting at 10 million bucks…and then someone would bid 12 million…and then 20 million...and then 50 million…and eventually it would sell for 312 million bucks or whatever price the painting commanded.

But not the Dutch.

For them, things go the other way...and this system has actually been used in a few famous or infamous IPOs of stocks. Basically, a Dutch Auction is a public offering where the offering price is decided by asking for bids. The bids are mulled over to find the price at which securities will be sold.

In fact, Google did a Dutch Auction when it went public and things didn’t go so well at first…but over time, the company, uh, bailed itself out.

A normal IPO is kind of an auction in and of itself. Investors indicate interest, and prices are gathered by capital markets people at the bank…along with volumes of shares in which mutual and hedge funds want to invest. And eventually when the, uh, say, 15 million shares have enough demand at, say, 20 bucks a share. The bank then executes on the IPO to raise 300 million smackers…for the, uh...Smacker Company.

But many IPOs zoom upwards the first day of trading—Smacker (no relation to Smucker) was priced at 20 and closed the day at 30. So how do you think that made the company feel? The company would guess that it could have sold the shares at 30 instead of 20…it left 10 bucks a share on the table...and times 15 million, that’s 150 million dollars it could have raised that it didn't.

So to counter that perceived unfairness, every now and then companies going public spin things around. They wear wooden shoes to their meetings...and in this case might start the bidding at 40 bucks a share. If they hear crickets…they bring it down to 35 a share.

Maybe more crickets…and it’s at 30.

There is noise now—actively interested investors. And maybe they raise the money at 30 bucks. But what happens the next week or weeks or months if the company just performs as they said they would... i.e. not awful and not amazing?

Well, at that point, the bored investors start to sell their shares, and it's likely that the 30 bucks a share price declines…maybe a lot…as almost no investors will have made money in the IPO they took risk to invest in.

It’s called low sponsorship, and the Street is fast to turn its back on it. And that's just sad.

So even though Smacker has a higher share price at their IPO in this scenario than in the previous one, it ends up up hurting them in the long run. You might even say it ends up smacking them right in the…well, you know.