Auction Rate Security - ARS

Finance a la shmoop what is a Dutch auction? and not to be confused with a

Dutch oven what okay we're moving on all right [Boy in bed and oven appears on bed]

leave it to the Dutch to do things in reverse order like shoes are supposed to

be soft and comfy right but no they had to do wood so normally you'd auction a

Mona Lisa starting at 10 million bucks and then someone would bid 12 million [Mona Lisa painting appears]

and then 20 million and then 50 million eventually it sell for like 312 million

bucks or whatever price she commanded right but no not the Dutch for them

things go the other way and this system has actually been used in a few famous

and or infamous IPOs of stocks well basically a Dutch auction is a public

offering where the offering price is decided by asking for bids the bids are

kind of mulled over to find the price at which securities can then all be sold

like you started a high number and then you go lower and lower until you have [Man discussing dutch auctions]

enough demand to then clear the sale in fact Google did a Dutch auction when it

went public and things did not go so well but well you know over the time the

company bailed itself out pretty good there right all right well a normal IPO

is kind of normal auction in and of itself investors indicate interest and

prices are gathered and gradually increased by capital markets people at

the bank along with volumes of shares mutual and hedge funds that want to

invest and eventually when they say fifteen million shares have enough

demand at oh say 20 bucks a share well the bank then executes on the IPO to

raise 300 million smackers for the you know smacker company different

but many IPOs zoom upwards the first day of trading smacker no [Rocket launches into the air]

relation to Schmucker was priced at 20 and closed the day at 30 so how do you

think that made the company feel well the company would guess that it could

have sold the shares at 30 instead of 20 like those knuckleheads at the bank it

left 10 bucks a share on the table and times 15 million shares that's 150

million dollars it could have raised which it didn't so to counter that

perceived unfairness every now and then companies going public spin things

around they wear wooden shoes to start their meetings and in this case we only [A pair of wooden shoes appear]

might start the bidding at 40 bucks a share and if they hear

crickets they bring it down to 35 maybe more crickets and well then it's at 30

there's noise now actively interested investors and maybe they raise the money [People celebrating in a crowd]

at 30 bucks but what happens the next week or weeks or months if company just

performs as they said they would ie not awful and not amazing well at that point

the board investors start to just sell their shares and it's likely that the 30

bucks a share price declines maybe a lot as almost no investors will have made [Share price declines]

money in the IPO they took risk to invest in

it's called low sponsorship and the street is fast to turn its back on it so

even though smacker has a higher share price at their IPO in this scenario than

in the previous one, well it ends up hurting them in the long run because

they just don't have a lot of people who follow the stock and later on down the

line when the company really wants its stock to have a high price they have a

currency and they can go buy up all their competitors and so on and so on

well the stock doesn't have sponsorship so it doesn't have the high prices just

doesn't have a lot of demand not a lot of investors who care how the stock does

that's the penalty when you do a Dutch auction yeah and you might even say for [Penalty stamped on company]

smackers well it ends up smacking them right in the you know...