Netsuite’s Dutch Auction

Vinnie Mirchandi at Deal Architect commenting on Netsuite’s recent IPO. They IPO’d at $26 a share. From an auction perspective it’s instructive that they made their offering based on a Forwards Dutch Auction. And, guess what, it raised much more money than if the IPO had been priced at the $13 – $16/$16 – $19 level they were looking at previously.

Some feared an auction would give rise to the winner’s curse (*). If so the stock would have dropped in price dramatically after its listing.

Yet the stock price rose on its first day of trading and, even after its recent downward slide, it is still trading over $30 at the time of writing.(**)

Goes to show that an auction does get better results (when used properly) than not doing an auction.

(*) The winner’s curse theory goes as follows: People know how much they are prepared to pay for something (let’s say a car). This is based on what they believe it is worth. On average, some people will underestimate the value of the car, others will overestimate it. During the auction the price rises gradually as higher and higher bids come in. As the price rises people will stop bidding when the price gets above what they think the car’s worth. The person who wins the auction is the person who bids highest. The  person who bids highest is the one who thinks the car is worth the most. The person who thinks the car is worth the most is one who has overestimated its value. So the winner overpays.
(**) Which still seems ludicrously bubbly for a loss-making company.

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