Dutch Auction Tender Offers Explained

Shanthi Rexaline
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Resources Connection, Inc. (NASDAQ: RECN) recently announced preliminary results of its modified "Dutch auction" tender offer to buy up to 6 million shares at a price not greater than $16 nor less than $13.50.

The stock closed at $15.90 on the day of the announcement, up from $15.75 in the previous session.

The term "Dutch auction" may sound all Greek and Latin to many investors, although they get to see the word thrown around in press releases of companies. What does a Dutch auction mean? Why do companies prefer it over the traditional offering? Benzinga set out to explore answers for these questions.

Meaning

Dutch auction is a method of public offering in which the price of the shares are lowered until there are enough bids to sell all shares. The price of the offering is then lowered to this lowest bid. Dutch auction happens online.

WR Hambrecht, based in San Francisco, is a specialist in this method of public offering, having patented the process for its OpenIPO.

Methodology Explained

  • The company offering shares will announce the maximum number of shares to be sold and could reveal a potential price for the shares.

  • Investors interested in bidding for the shares open an account with the company's underwriter and obtains an access code or bidder identification code.

  • During the bidding process, investors quote the number of the shares and the price at which they are willing to buy them.

  • The underwriter, usually the investment banker, now quotes a price for the share, which is usually an elevated amount. The price is lowered in steps to attract bids.

  • The highest bids adding up to the number of shares on offer will be considered as winning bids.

  • Now for the more attractive part: The price of the shares is set to the lowest winning bid, and even the ones who bid at a price higher than the lowest winning bid get to pocket the shares at the lowest winning bid price.

Dutch Vs. Traditional Offering

Unlike the traditional IPO offering, a Dutch auction is a more efficient method to find the price based on demand and supply. Some believe retail investors get the best chance to participate in the offering, as in a traditional offering, investment bankers tend to channelize the offering to their best clients.

However, some also feel that Dutch auctions may not offer the least possible price, as pricing of a traditional offering is priced low to ensure sale of all shares. When these shares begin trading, they pop up due to the fundamental appeal of the company and thus a run up in the share price is seen.

Who Uses Dutch Auction?

  • U.S. Treasury to sell treasury securities.

  • U.S. Corporations to buy back shares.

  • Search giant Google, which has since then changed named itself Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL), used this method for its IPO way back in 2004. The company's rationale was that the method allows access to as many individual investors as possible and let these investors set the price.

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