Dutch auctions prove viable alternative to IPOs
Published May 10th, 2007
In Dutch auctions, made famous during the stock market debut of online search engine Google, investors bid for shares and the final offer price is based on the highest level at which orders for all the offered shares can be filled. The auctioneer starts out at a prohibitively high price and gradually lowers this, filling the share allocation gradually at a range of prices.
Thomas Peterffy, the maverick founder and chairman of Interactive Brokers, has said he preferred a Dutch auction process because it gave all investors an equal chance to get in on the act.
One analyst said: “He couldn’t very well do the float in any other way, given the business model he preaches of easy automated access to trading venues. Using the Dutch auction process for the initial public offering is clearly the option that is most in line with this sort of thinking.”
Traditional IPOs are priced and allocated by powerful Wall Street firms, which balance the competing interests of issuers, investors, trading clients and themselves.
But the success of the $1.2bn IPO of Interactive Brokers, whose shares soared as much as 14 per cent before falling back, could prompt other companies to follow suit, according to several analysts.
The deal was co-led by HSBC, only the second time the bank has led a US IPO. The other lead co-manager was WR Hambrecht, which pioneered the Dutch auction-style flotation during the dotcom bubble.
Alongside the $1bn-$2bn fund-raisings by Google and Interactive Brokers, other floats conducted by auction have been smaller and met varying degrees of success. Only three other WR Hambrecht deals raised more than $50m since 1999, while only two deals were offered by auction last year.
Critics of the process point to the fact that the widely predicted surge in use of the Dutch auctions following Google failed to materialise.
At the time some blamed glitches that Google encountered during its flotation on the process it used. For example, they argue that the Dutch auction was flawed because Google at one point reset its offer range.
Others consider the ability to reset the price range to be a strength of the Dutch auction, not a weakness. Rather than forcing Google to commit to a clearing price, the process gave Google the ability to set a price based on investor demand as revealed through the bidding process.
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