9.2.1. Dutch Auction IPOs
The standard method of allocation described above is called book-building. This section describes an alternative to book-building called a Dutch auction IPO. This method garnered attention when it was employed in Google’s high-profile IPO. Dutch auctions are also used in the sale of new U.S. Treasury securities, as well as some tender offers.
While the exact procedures vary, broadly speaking a Dutch auction is an auction in which each bidder places a bid for a certain number of shares at the highest price he is willing to pay. The bids are accepted starting with the highest bidder on down until all shares are sold. The price at which the final share is sold is the price that all successful bidders actually pay, even the ones that bid higher. Because the bids are more than just IOIs, a Dutch auction cannot commence until after the effective date.
It is possible that the total number of shares desired by all winning bidders will exceed the number of shares available. The prospectus will state how the issuer and underwriters will deal with oversubscribed shares. For example, the shares might be allocated on a pro rata basis.
Example: Dam & Polder, Inc. offers 1 million shares in a Dutch auction IPO. It receives five bids:
|
Bid Price per Share |
# of Shares Bid On |
|
|
Bidder A |
$58 |
150,000 |
|
Bidder B |
$55 |
280,000 |
|
Bidder C |
$54 |
335,000 |
|
Bidder D |
$52 |
310,000 |
|
Bidder E |
$50 |
230,000 |