RE: Suggest we all put very high sell orders on our holdings!2 Jan 2025 10:38
Matt,
Have a read of this.....suggests buyers will be bidding at premiums to secure the shares they want to take which could easily be well above 9p
The dutch auction process has been designed in such a way that it encourages investors to bid higher prices and raises the proceeds of the IPO. Let us understand the Dutch auction process with the help of an example:
Example:
Company A wants to sell 300 shares. It has asked investors to bid for the shares and has received four bids.
Investor B bids for 100 shares at $16 per share
Investor C bids for 100 shares at $14 per share
Investor D bids for 200 shares at $12 per share
Investor E bids for 200 shares at $10 per share
Notice that the company wants to sell 300 shares. Hence, if it were to sell only to investor B, its supply would not be exhausted. If it sells to C as well, then too, it sells 200 shares only. However, when the company sells to investor D, it ends up selling more than 300 shares. There are two points to be noted here.
The cut off price will be decided based on the lowest bid at which the company can sell all its shares. In this case, that bid is from investor D. Hence, the strike price is $12 per share. Note that all shares will be sold at $12 per share. Hence, even though investor B made a higher bid at $16 per share, they would have to pay only $12 per share. All winning bidders have to pay the lowest bid price! Hence, this system encourages investors to bid higher prices, which helps in increasing the overall valuation of the IPO.
The company wanted to sell only 300 shares. However, until investor D, they have to allocate 400 shares. The bid received from investor E will be discarded. However, the others will be allotted shares based on an allocation ratio. Here, the supply is 300 shares, and the demand till investor D is 400 shares. Hence, the allocation ratio is 300/400, i.e., 75%. So investor B will receive 75 shares even though he/she has bid for 100 shares.
The bottom line is that even though book building is still the most popular underwriting method today, it is facing competition from the Dutch auction method, which many believe is more popular.
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