Dutch Auctions. What is the best strategy to use?

We want to be clear that Well Auctioned does not promote or develop particular strategies for any customer. One fundamental thought to keep in mind when considering an investment, is that IPOs are speculative and risky. Being of a conservative mind is always a good way to think—better to bid conservatively and lose---a Dutch Auction fills the upper end of pricing demand which may dampen the so-called aftermarket “pop”. So you may not “lose” much upside. You likely can buy it the next day on the open market if you still have interest. On the other hand bidding too high could cause a real financial loss on the downside (See the next FAQ).

What we can say very strongly is that the best strategy is to be well informed before you invest your hard earned money. Read the prospectus and some unbiased research (if at all possible), participate in our simulator to get comfortable with the auction process and devise your own strategies, and above all, discuss all of your findings and open questions with your financial advisor before you invest.

Will I be assured of winning the auction if I bid a very high price (say $100/share for a stock that the underwriters think might be priced around $30 per share)?

Perhaps, but it is a risky strategy for two reasons: (1) you might be eliminated from the auction entirely for placing a so-called “manipulative” bid, or (2) you and other like-minded bidders might befall the “winner’s curse” of paying far too much, with little hope of finding a buyer later at that price for your shares---in other words you might be in for a major financial loss or at least not see a profit for a very long time.

Won’t the big institutional investors squeeze out the little retail investors?

A Dutch Auction levels the playing field in the sense that if investors do their homework on what a stock is worth to them, and others bid that price or lower, then that investor will get some or all of their desired amount---it doesn’t matter whether the investor is large or small, famous or not. It is true; however, that if a small investor is a winner among a pack of large institutions, the amount the small investor may be allocated could be reduced—but to some degree that will also happen to the institutions as well depending on where they bid.

How do individuals bid versus institutions?

To generalize, individuals tend to bid higher than institutions especially if it is a recognizable company or product that they use. However, many times useful products do not in themselves generate profitable businesses (eg the airlines). Institutional investors make it their business to study these issues intensively, therefore they may be more conservative on value. Well Auctioned was created so that all investors could have the ability to study an IPO, learn, practice and determine a course of action before the IPO—something we hope will begin to level the playing field.

What Dutch Auctions for US IPOs have occurred and how did they fare in the first 90 days after the pricing?

Our analysis indicates that in the last 5 years that 9 Dutch Auctions have occurred for US IPOs, Mostly, they were undertaken by smaller emerging growth companies such as Overstock, Red Envelope, Pete’s Coffee, and Briazz Café. Interestingly, there was one large hybrid type auction for the IPO of Instinet, where there was a simultaneous “book build” for 80% of the transaction and a dutch auction for 20%. In some cases the lead manager and the issuing corporation purposefully reduced the price determined by the dutch auction to attempt to build a reward of a “pop” for the winners.

Price performance on the first day of trading ranged from -38% to 189% with a closing return of 2% (data based on 8 dutch auction IPOs). Price performance over ninety days ranged from -71% to 115% with a closing return of -16%. The best performer generated a 189% “pop” on the first day’s close, and a 115% positive return after 90 days. The worst performers generated a 38% loss” on the first day’s close, and a -46% return after 90 days.

Disclaimer. No information provided by Well Auctioned or its website shall be construed as tax, financial or investment advice. Participation in Well Auctioned is entirely voluntary and does not convey any special rights or privileges to investors with regard to an actual IPO�s final pricing or allocation thereof. Well Auctioned is not affiliated with any NASD member. Simulated Auction results may vary from Actual Auction results, and Well Auctioned assumes no liability for any loss (actual or imputed) for such participation. Full Terms and Conditions
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