Dutch auction

Last updated
A 1957 Dutch auction in Germany to sell fruit. Bundesarchiv B 145 Bild-F004491-0002, Kirschenversteigerung an der Mosel.jpg
A 1957 Dutch auction in Germany to sell fruit.

A Dutch auction is one of several similar kinds of auctions. Most commonly, it means an auction in which the auctioneer begins with a high asking price, and lowers it until some participant accepts the price, or it reaches a predetermined reserve price. This has also been called a clock auction or open-outcry descending-price auction. This type of auction is good for auctioning goods quickly, since a sale never requires more than one bid. Strategically, it's similar to a first-price sealed-bid auction.

Auction process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder

An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. The open ascending price auction is arguably the most common form of auction in use today. Participants bid openly against one another, with each subsequent bid required to be higher than the previous bid. An auctioneer may announce prices, bidders may call out their bids themselves, or bids may be submitted electronically with the highest current bid publicly displayed. In a Dutch auction, the auctioneer begins with a high asking price for some quantity of like items; the price is lowered until a participant is willing to accept the auctioneer's price for some quantity of the goods in the lot or until the seller's reserve price is met. While auctions are most associated in the public imagination with the sale of antiques, paintings, rare collectibles and expensive wines, auctions are also used for commodities, livestock, radio spectrum and used cars. In economic theory, an auction may refer to any mechanism or set of trading rules for exchange.

A reservationprice is a limit on the price of a good or a service. On the demand side, it is the highest price that a buyer is willing to pay; on the supply side, it is the lowest price at which a seller is willing to sell a good or service. Reservation prices are commonly used in auctions, but the concept is extended beyond.

A first-price sealed-bid auction (FPSBA) is a common type of auction. It is also known as blind auction. In this type of auction, all bidders simultaneously submit sealed bids, so that no bidder knows the bid of any other participant. The highest bidder pays the price they submitted.

Contents

History

Dutch auction has its roots in the 17th-century Dutch flower market.

Auction process

A Dutch auction initially offers an item at a price in excess of the amount the seller expects to receive. The price lowers in steps until a bidder accepts the current price. That bidder wins the auction and pays that price for the item. For example, a business might auction a used company car at a starting bid of $15,000. If nobody accepts the initial bid, the sellers successively reduce the price in $1,000 increments. When the price reaches $10,000, a particular bidder—who feels that price is acceptable and that someone else will agree, or might bid first if the price goes to $9,000—quickly accepts the bid, and pays $10,000 for the car.

Dutch auctions are a competitive alternative to a traditional auction, in which customers make bids of increasing value until nobody is willing to bid higher. [1]

Second price auction

Some financial commentators[ who? ] and some third-party[ clarification needed ] auction sites use Dutch auction to refer to second-price auctions, which work differently from Dutch auctions.[ citation needed ]

Public offerings

The United States Department of the Treasury, through the Federal Reserve Bank of New York (FRBNY), raises funds for the U.S. Government using a Dutch auction. The FRBNY interacts with primary dealers, including large banks and broker-dealers who submit bids on behalf of themselves and their clients using the Trading Room Automated Processing System (TRAPS), and are generally told of winning bids within fifteen minutes.

United States Department of the Treasury United States federal executive department

The Department of the Treasury (USDT) is an executive department and the treasury of the United States federal government. Established by an Act of Congress in 1789 to manage government revenue, the Treasury prints all paper currency and mints all coins in circulation through the Bureau of Engraving and Printing and the United States Mint, respectively; collects all federal taxes through the Internal Revenue Service; manages U.S. government debt instruments; licenses and supervises banks and thrift institutions; and advises the legislative and executive branches on matters of fiscal policy.

Federal Reserve Bank of New York

The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, New York. It is responsible for the Second District of the Federal Reserve System, which encompasses New York State, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico, and the U.S. Virgin Islands. Working within the Federal Reserve System, the Federal Reserve Bank of New York implements monetary policy, supervises and regulates financial institutions and helps maintain the nation's payment systems.

A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behavior and number of its primary dealers and impose conditions of entry. Some governments sell their securities only to primary dealers; some sell them to others as well. Governments that use primary dealers include Belgium, Brazil, Canada, China, France, Hong Kong, India, Italy, Japan, Singapore, Spain, the United Kingdom, and the United States.

For example, suppose the sponsor of the issuance seeks to raise $10 billion in ten-year notes with a 5.125% coupon and in aggregate the bids are as follows:

In this example the % at high is 66.66%, meaning only $3 billion of the $4.5 billion at 5.130% get bonds. Bids are filled from the lowest yield (highest price) until the process raises the entire $10 billion. This auction clears at a yield of 5.130%, and all bidders pay the same amount. In theory, this feature of the Dutch auction leads to more aggressive bidding, as those who (in this example) bid 5.115% receive the bonds at the higher yield (lower price) of 5.130%.

A variation on the Dutch auction, OpenIPO, was developed by WR Hambrecht and has been used for 19 IPOs in the US. Auctions have been used for hundreds of IPOs in more than two dozen countries, but have not been popular with issuers and thus were replaced by other methods. One of the largest uniform price or "Dutch" auction IPOs was for Singapore Telecom in 1994. The 1994 auction IPO of Japan Tobacco was substantially larger (with proceeds more than double those of Singapore Telecom and triple those of Google), but this auction was discriminatory or pay-what-you-bid, not uniform price or "Dutch". SRECTrade.com uses a two-sided Dutch auction to trade Solar Renewable Energy Credits (SRECs).

OpenIPO is a modified Dutch auction which allows shares of an initial public offering (IPO) to be allocated in an impartial way. It is a variation on the traditional way that shares are sold during the IPO process and results in all successful bidders paying the same price per share.

Google American multinational Internet and technology corporation

Google LLC is an American multinational technology company that specializes in Internet-related services and products, which include online advertising technologies, search engine, cloud computing, software, and hardware. It is considered one of the Big Four technology companies, alongside Amazon, Apple and Facebook.

Solar Renewable Energy Certificates (SRECs) or Solar Renewable Energy Credits are a form of Renewable Energy Certificate or "Green tag" existing in the United States of America. SRECs exist in states that have Renewable Portfolio Standard (RPS) legislation with specific requirements for solar energy, usually referred to as a "solar carve-out". The additional income received from selling SRECs increases the economic value of a solar investment and assists with the financing of solar technology. In conjunction with state and federal incentives, solar system owners can recover their investment in solar by selling their SRECs through spot market sales or long-term sales, both described below.

Dutch auction share repurchases

The introduction of the Dutch auction share repurchase in 1981 gives firms an alternative to the fixed price tender offer when executing a tender offer share repurchase. The first firm to use the Dutch auction was Todd Shipyards. A Dutch auction offer specifies a price range within which the shares are purchased. Shareholders can choose to tender their stock at any price within the stated range. The firm compiles these responses, creating a supply curve for the stock. [2] The purchase price is the lowest price that allows the firm to buy the number of shares sought in the offer, and the firm pays that price to all investors who tendered at or below that price. If the number of shares tendered exceeds the number sought, the company purchases less than all shares tendered at or below the purchase price pro rata to all who tendered at or below the purchase price. If too few shares are tendered, then the firm either cancels the offer (provided it had been made conditional on a minimum acceptance), or it buys back all tendered shares at the maximum price.

In corporate finance, a tender offer is a type of public takeover bid. The tender offer is a public, open offer or invitation by a prospective acquirer to all stockholders of a publicly traded corporation to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders directly; the directors of the company may or may not have endorsed the tender offer proposal.

Share repurchase is the re-acquisition by a company of its own stock. It represents a more flexible way of returning money to shareholders.

See also

Notes

  1. "Dutch Auction Software with Epiq Tech". epiqtech.com.
  2. To understand the Dutch auction bidding and outcome from actual shareholder tendering responses, see Bagwell, Laurie Simon (1992). "Dutch auction repurchases: An analysis of shareholder heterogeneity". Journal of Finance . 47 (1): 71–105. doi:10.1111/j.1540-6261.1992.tb03979.x. JSTOR   2329091.

Related Research Articles

A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover. Typically, such a plan gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company's shares. The plan could be triggered, for instance, if any one shareholder buys 20% of the company's shares, at which point every shareholder will have the right to buy a new issue of shares at a discount. If every other shareholder is able to buy more shares at a discount, such purchases would dilute the bidder's interest, and the cost of the bid would rise substantially. Knowing that such a plan could be activated, the bidder could be disinclined to take over the corporation without the board's approval, and would first negotiate with the board in order to revoke the plan.

In business, a takeover is the purchase of one company by another. In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.

Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company. Initial public offerings can be used: to raise new equity capital for the company concerned; to monetize the investments of private shareholders such as company founders or private equity investors; and to enable easy trading of existing holdings or future capital raising by becoming publicly traded enterprises.

Equity (finance) difference between the value of the assets/interest and the cost of the liabilities of something owned

In accounting, equity is the difference between the value of the assets and the value of the liabilities of something owned. It is governed by the following equation:

eBay American multinational e-commerce corporation

eBay Inc. is an American multinational e-commerce corporation based in San Jose, California that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in the autumn of 1995, and became a notable success story of the dot-com bubble. eBay is a multibillion-dollar business with operations in about 30 countries, as of 2011. The company manages the eBay website, an online auction and shopping website in which people and businesses buy and sell a wide variety of goods and services worldwide. The website is free to use for buyers, but sellers are charged fees for listing items after a limited number of free listings, and again when those items are sold.

Public company Company that offers its securities for sale to the general public

A public company, publicly traded company, publicly held company, publicly listed company, or public limited company is a corporation whose ownership is dispersed among the general public in many shares of stock which are freely traded on a stock exchange or in over the counter markets. In some jurisdictions, public companies over a certain size must be listed on an exchange. A public company can be listed or unlisted.

United States Treasury security A marketable, fixed-interest U.S. government debt security

A United States Treasury security is a government debt instrument issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Treasury securities are often referred to simply as Treasuries. Since 2012 the management of government debt has been arranged by the Bureau of the Fiscal Service, succeeding the Bureau of the Public Debt.

Greenmail or greenmailing is the action of purchasing enough shares in a firm to challenge a firm's leadership with the threat of a hostile takeover to force the target company to buy the purchased shares back at a premium in order to prevent the potential takeover. The greenmail strategy has evolved since its first practices with ways to counter greenmail, other variations of greenmail, as well as ways to reinforce a greenmail tactic. In the area of mergers and acquisitions, the greenmail payment is made in an attempt to stop the hostile takeover.

An online auction is an auction which is held over the internet. Online auctions come in many different formats, but most popularly they are ascending English auctions, descending Dutch auctions, first-price sealed-bid, Vickrey auctions, or sometimes even a combination of multiple auctions, taking elements of one and forging them with another. The scope and reach of these auctions have been propelled by the Internet to a level beyond what the initial purveyors had anticipated. This is mainly because online auctions break down and remove the physical limitations of traditional auctions such as geography, presence, time, space, and a small target audience. This influx in reachability has also made it easier to commit unlawful actions within an auction. In 2002, online auctions were projected to account for 30% of all online e-commerce due to the rapid expansion of the popularity of the form of electronic commerce.

Formally known as an "over-allotment option," a greenshoe is the term commonly used to describe a special arrangement in a share offering, for example an initial public offering (IPO), which enables the investment bank representing the underwriters to support the share price after the offering without putting their own capital at risk. The option is codified as a provision in the underwriting agreement between the leading underwriter - the lead manager - and the issuer or vendor.

Lock-up provision is a term used in corporate finance which refers to the option granted by a seller to a buyer to purchase a target company’s stock as a prelude to a takeover. The major or controlling shareholder is then effectively "locked-up" and is not free to sell the stock to a party other than the designated party.

Ask price, also called offer price, offer, asking price, or simply ask, is the price a seller states they will accept.

Auction rate security

An auction rate security (ARS) typically refers to a debt instrument with a long-term nominal maturity for which the interest rate is regularly reset through a dutch auction. Since February 2008, most such auctions have failed, and the auction market has been largely frozen. In late 2008, investment banks that had marketed and distributed auction rate securities agreed to repurchase most of them at par.

A squeeze-out or squeezeout, sometimes synonymous with freeze-out (freezeout), is the compulsory sale of the shares of minority shareholders of a joint-stock company for which they receive a fair cash compensation.

A multiunit auction is an auction in which several items are sold. The units can be sold each at the same price or at different prices.

Bid-To-Cover Ratio is a ratio used to express the demand for a particular security during offerings and auctions. In general, it is used for shares, bonds, and other securities. It may be computed in two ways: either the number of bids received divided by the number of bids accepted, or the value of bids received divided by the value of bids accepted.

A reverse auction is a type of auction in which the roles of buyer and seller are reversed. In an ordinary auction, buyers compete to obtain goods or services by offering increasingly higher prices. In a reverse auction, the sellers compete to obtain business from the buyer and prices will typically decrease as the sellers underbid each other.

References