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Finance a la shmoop what is a Dutch auction? and not to be confused with a

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Dutch oven what okay we're moving on all right [Boy in bed and oven appears on bed]

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leave it to the Dutch to do things in reverse order like shoes are supposed to

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be soft and comfy right but no they had to do wood so normally you'd auction a

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Mona Lisa starting at 10 million bucks and then someone would bid 12 million [Mona Lisa painting appears]

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

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

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

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

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

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

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

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

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

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

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

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prices are gathered and gradually increased by capital markets people at

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

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invest and eventually when they say fifteen million shares have enough

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

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raise 300 million smackers for the you know smacker company different

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

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

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

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

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

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

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perceived unfairness every now and then companies going public spin things

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

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

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

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

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

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

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

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

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money in the IPO they took risk to invest in

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

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

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

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

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

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

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

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

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

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

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