Finance: What is a Dutch Auction?

What is a Dutch Auction? A Dutch Auction is either one where closed quantity and price bids are entered and the price is set at the highest price that will allow for the entire quantity to be cumulatively purchased. The Google IPO was a Dutch Auction example. Numerous bids and quantities were proffered and the stock wound up opening at 85 instead of the expected 108. The other Dutch auction version is when a price starts high and is lowered until the first open bid is entered, which would win the entire amount.

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Transcript

00:26

and then 20 million and then 50 million eventually it sell for like 312 million

00:31

bucks or whatever price she commanded right but no not the Dutch for them

00:36

things go the other way and this system has actually been used in a few famous

00:40

and or infamous IPOs of stocks well basically a Dutch auction is a public

00:45

offering where the offering price is decided by asking for bids the bids are

00:50

kind of mulled over to find the price at which securities can then all be sold

00:55

like you started a high number and then you go lower and lower until you have [Man discussing dutch auctions]

00:59

enough demand to then clear the sale in fact Google did a Dutch auction when it

01:04

went public and things did not go so well but well you know over the time the

01:09

company bailed itself out pretty good there right all right well a normal IPO

01:12

is kind of normal auction in and of itself investors indicate interest and

01:17

prices are gathered and gradually increased by capital markets people at

01:20

the bank along with volumes of shares mutual and hedge funds that want to

01:24

invest and eventually when they say fifteen million shares have enough

01:28

demand at oh say 20 bucks a share well the bank then executes on the IPO to

01:33

raise 300 million smackers for the you know smacker company different

01:38

but many IPOs zoom upwards the first day of trading smacker no [Rocket launches into the air]

01:43

relation to Schmucker was priced at 20 and closed the day at 30 so how do you

01:47

think that made the company feel well the company would guess that it could

01:51

have sold the shares at 30 instead of 20 like those knuckleheads at the bank it

01:55

left 10 bucks a share on the table and times 15 million shares that's 150

02:00

million dollars it could have raised which it didn't so to counter that

02:03

perceived unfairness every now and then companies going public spin things

02:08

around they wear wooden shoes to start their meetings and in this case we only [A pair of wooden shoes appear]

02:12

might start the bidding at 40 bucks a share and if they hear

02:15

crickets they bring it down to 35 maybe more crickets and well then it's at 30

02:20

there's noise now actively interested investors and maybe they raise the money [People celebrating in a crowd]

02:24

at 30 bucks but what happens the next week or weeks or months if company just

02:28

performs as they said they would ie not awful and not amazing well at that point

02:32

the board investors start to just sell their shares and it's likely that the 30

02:37

bucks a share price declines maybe a lot as almost no investors will have made [Share price declines]

02:42

money in the IPO they took risk to invest in

02:45

it's called low sponsorship and the street is fast to turn its back on it so

02:49

even though smacker has a higher share price at their IPO in this scenario than

02:54

in the previous one, well it ends up hurting them in the long run because

02:57

they just don't have a lot of people who follow the stock and later on down the

03:01

line when the company really wants its stock to have a high price they have a

03:04

currency and they can go buy up all their competitors and so on and so on

03:07

well the stock doesn't have sponsorship so it doesn't have the high prices just

03:10

doesn't have a lot of demand not a lot of investors who care how the stock does

03:13

that's the penalty when you do a Dutch auction yeah and you might even say for [Penalty stamped on company]

03:17

smackers well it ends up smacking them right in the you know...