Archive of UserLand's first discussion group, started October 5, 1998.
Re: Salon IPO--everyone's missing the point
Author: Christopher Short Posted: 6/24/1999; 11:59:07 PM Topic: Salon IPO--everyone's missing the point Msg #: 7810 (In response to 7791) Prev/Next: 7809 / 7811
Dutch Auctions have nothing to do with "not intending to favour insiders" - though that's an obvious consequence.Dutch Auctions are a mechanism for eliciting people's true willingness to pay for a good (or a stock in this case).
In setting the price of an IPO, underwriters bear a risk that it will not be fully subscribed (and hence have to pay for that unpurchased stock). In these heady internet stock days, that may not be much of an issue - but it is with many stock offerings elsewhere in the economy.
Part of this risk is offset by striking an offer price at a level that reduces that risk (what has been pejoratively referred to as "insiders" in the wired article)
By moving to a Dutch Auction - that risk has been removed from the underwriter. But it also removes much of the role of the underwriter, and imposes the costs on investors to do the work to value a firm.
Given that much of the internet price bubble is a bet, a firm saves costs by going to a dutch auction (since it doesn't have to pay for the broker/underwriter to do much work), and since the value is part speculation - valuing a firm is difficult to do, so investors don't really have too much work either.
If Dutch Auctions take off, then whenever the industry shakes itself out (who knows when) and internet stocks are valued by expected returns (as happens with other stocks) then I'd bet that Dutch auctions will quietly return to an academic interest and the art market (where they have operated for a while) - and you'd see a return to the use of underwriters!
Cheers, Christopher (hey look - an economics question!)
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