tim's journal

Dutch auction

One of the most anticipated and unusual factoid regarding the upcoming Google IPO is that it will be conducted using a Dutch auction. As you may know, in most IPOs, underwriters price the initial offering and then give first dibs to clients, friends and family.

In a Dutch auction, the issuer and the banker give up their discretion over pricing and allocation. The final IPO price is at least close to the highest price the market is willing to pay, rather than at a deflated pricing level that all but ensures no-risk gains for favored players.

While unusual, this Dutch-auction offerings won't be the first. RedEnvelope, Overstock.com, Salon.com, Ravenswood Winery, Briazz and Peet's Coffee all went public using this technique. Note that in their filing, Google states that the IPO price will be primarily based on the auctions - there may well be other factors to prevent things from overheating.

RedEnvelope went public September 2003. Approximately 2.2 million shares were offered through WR Hambrecht & Co.'s OpenIPO system. As a result, shares were priced at $14 resulting in $29 M in net proceeds. Hambrecht & Co. have a nifty flash demo of how it all works. OpenIPO is not exactly a Dutch auction system, but it retains most elements. It is based on work by Nobel Prize-winning economist William Vickrey. You can read more on his work on auctions at the National Academy of Sciences.

Posted by torque at April 29, 2004 3:44 PM | TrackBack