Gregg Greenberg
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I read that Microsoft recently held a Dutch auction. What are they, and how do they work? Thanks, S.M. Named after the auctions of tulip bulbs in the 17th century, Dutch auctions are not uncommon on Wall Street. They are routinely used in U.S. Treasury bond sales, as well as in share-buyback plans like the one announced by Microsoft. Nevertheless, Dutch auctions, also known as descending-price auctions, get the most publicity when used for initial public offerings, such as in the case of Google (GOOG Quote - Cramer on GOOG - Stock Picks) two years ago. In a Dutch auction IPO, the company and its investment banks initially determine how many shares they intend to sell to the public and establish a price range for the stock. Investors then submit bids proposing their own price for the stock and how many shares they intend to purchase. Ultimately, the bidding process determines an optimal market price for the stock, which is the lowest price at which the issuing company can unload all the available shares. By using this method, investors receive equal treatment because they all pay the same price and never more than their bid. Meanwhile, the issuing companies get an offering price based on market demand instead of an investment bank's best approximation of the stock's value in the open market. This reduces the opening day "pop" seen by many high-profile IPOs. That pop may be great for those lucky investors with IPO shares; however, it theoretically leaves money on the table that could have been pocketed by the issuer.
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