Advantages and disadvantages of using a Dutch Auction

Sample Solution

  Dutch Auction

• Advantages:
  • More transparent and efficient pricing mechanism
  • Can result in higher proceeds for the issuer
  • Gives investors more control over the price they pay

Full Answer Section

 

• Disadvantages:
  • Can be more complex and time-consuming to administer
  • May result in a lower initial price if there is not enough demand

Traditional Underwriting

• Advantages:
  • More familiar and established process
  • Can be more predictable and less risky for the issuer
  • Underwriters can provide marketing and distribution support
• Disadvantages:
  • Can result in lower proceeds for the issuer
  • Gives less control to investors over the price they pay
  • Can be less inclusive, as it favors larger investors

Real-Life IPO in 2020 One real-life IPO that occurred in 2020 was Snowflake, a cloud computing company. The IPO was a Dutch auction, and the initial price was set at \$120 per share. The stock price closed at \$180.05 on the first day of trading, and it reached a high of \$290.13 on day 10. The stock price closed at \$245.19 on day 30. The total amount of the offering was \$3.4 billion, and the number of shares offered was 28.2 million. The underwriter was Goldman Sachs, and the fees for the IPO were \$120 million. Evaluation of the IPO The IPO was a success from the perspective of the issuer, the underwriter, and investors. The issuer raised a significant amount of capital, the underwriter earned a substantial fee, and investors made a lot of money. The stock price more than doubled on the first day of trading, and it continued to rise in the following weeks. However, there are some potential drawbacks to using a Dutch auction for an IPO. For example, if there is not enough demand for the shares, the initial price could be lower than what the issuer would like. Additionally, the process can be more complex and time-consuming than a traditional underwriting. Overall, the Dutch auction is a viable option for companies that are looking to go public. It can be a more transparent and efficient pricing mechanism, and it can give investors more control over the price they pay. However, it is important to weigh the potential benefits and drawbacks before deciding whether or not to use a Dutch auction for an IPO. Additional Information

• The Dutch auction is a type of auction in which the seller sets a minimum price and then gradually lowers the price until all of the shares are sold.
• The traditional underwriting method is a process in which an investment bank underwrites an IPO by purchasing all of the shares from the issuer and then reselling them to investors.
• The underwriter in a Dutch auction is typically the same investment bank that would underwrite a traditional IPO.
• The fees for a Dutch auction are typically lower than the fees for a traditional IPO.