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.
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![Finance: What is a Dutch Auction?](https://media1.shmoop.com/video/thumbnails/COURSE.FINANCE.744_770x433.jpg)
Finance: What is a Dutch Auction?3 Views
Finance a la shmoop what is a Dutch auction? and not to be confused with a
Dutch oven what okay we're moving on all right [Boy in bed and oven appears on bed]
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 do wood so normally you'd auction a
Mona Lisa starting at 10 million bucks and then someone would bid 12 million [Mona Lisa painting appears]
and then 20 million and then 50 million eventually it sell for like 312 million
bucks or whatever price she commanded right but no not the Dutch for them
things go the other way and this system has actually been used in a few famous
and or infamous IPOs of stocks well basically a Dutch auction is a public
offering where the offering price is decided by asking for bids the bids are
kind of mulled over to find the price at which securities can then all be sold
like you started a high number and then you go lower and lower until you have [Man discussing dutch auctions]
enough demand to then clear the sale in fact Google did a Dutch auction when it
went public and things did not go so well but well you know over the time the
company bailed itself out pretty good there right all right well a normal IPO
is kind of normal auction in and of itself investors indicate interest and
prices are gathered and gradually increased by capital markets people at
the bank along with volumes of shares mutual and hedge funds that want to
invest and eventually when they say fifteen million shares have enough
demand at oh say 20 bucks a share well the bank then executes on the IPO to
raise 300 million smackers for the you know smacker company different
but many IPOs zoom upwards the first day of trading smacker no [Rocket launches into the air]
relation to Schmucker was priced at 20 and closed the day at 30 so how do you
think that made the company feel well the company would guess that it could
have sold the shares at 30 instead of 20 like those knuckleheads at the bank it
left 10 bucks a share on the table and times 15 million shares that's 150
million dollars it could have raised which it didn't so to counter that
perceived unfairness every now and then companies going public spin things
around they wear wooden shoes to start their meetings and in this case we only [A pair of wooden shoes appear]
might start the bidding at 40 bucks a share and if they hear
crickets they bring it down to 35 maybe more crickets and well then it's at 30
there's noise now actively interested investors and maybe they raise the money [People celebrating in a crowd]
at 30 bucks but what happens the next week or weeks or months if company just
performs as they said they would ie not awful and not amazing well at that point
the board investors start to just 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 [Share price declines]
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 so
even though smacker has a higher share price at their IPO in this scenario than
in the previous one, well it ends up hurting them in the long run because
they just don't have a lot of people who follow the stock and later on down the
line when the company really wants its stock to have a high price they have a
currency and they can go buy up all their competitors and so on and so on
well the stock doesn't have sponsorship so it doesn't have the high prices just
doesn't have a lot of demand not a lot of investors who care how the stock does
that's the penalty when you do a Dutch auction yeah and you might even say for [Penalty stamped on company]
smackers well it ends up smacking them right in the you know...
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