DUTCH AUCTION

DUTCH AUCTION

PURPOSE

Purpose of this presentation is to provide a overview of DUTCH AUTION, its purpose, and scope in current economy

AUCTION ???? Auction - comes from Latin word auctus to mean increase.– Not every auction has increasing prices.

Among one of the first engaging tales - Sale of Roman empire to the highest bidder in 1764.

A market institution that works on the concept of competition.

Natural discovery of price and buyers.

Types of auction – English Auction, dutch auction, All pay Auction, Bidding Fee Auction.

Types of Auction Primary type Auction ─ English Auction: Participants bid openly against one another, with each subsequent bid higher than the previous bid. ─ Dutch Auction: In Dutch auction the auctioneer begins with a high asking price. ─ Commodity Auction:  sell more than one identical item at the same time.

Types of Auction Secondary type of Auction ─ All pay Auction:  is an auction in which all bidders must pay their bids regardless of whether they win. ─ Buyout Auction:  is an auction with a set price that any bidder can accept at any time during the auction. ─ Combinatorial Auction:  is a type of smart market in which participants can place bids on combinations of discrete items.

DUTCH AUCTION - INTRODUCTION

Meaning - In a Dutch auction, the item being sold is initially offered at a very high price.

Bids are not sealed.

A type of auction in which the price on an item is lowered until it get its bid.

The first bid made is the winning bid and results in a

sale, assuming that the price is above the reserve price.

This type of auction is convenient when it is important to auction goods quickly.

FEATURES OF DUTCH AUCTION The auctioneer begins with a high asking price.

This is also known as a "clock auction" or an open-

outcry descending-price auction.

Price get lowered until some participant accept it.

 A sale never requires more than one bid.

DUTCH AUCTIONWHY AND WHY

NOTS????????

WHY DUTCH AUCTION?

oIt is fastest way to dispose of materials:

Bidding is easier There is typically only one bid Bidders typically bid earlier

o Dutch auction tend to generate higher prices.

Why not Dutch Auction? Overhead of time and infrastructure.

Unnecessarily increases the bid price.

It creates confusion among bidder.

auction settingForward auctions: a seller selling items to

buyers (bidders).

Reverse auctions: a buyer buying items from sellers/suppliers (bidders).

Both the settings are natural transpose of each other.

winning participant pays the last announced price.

AUCTION IN PRACTICETransfer of assets from public to private: Sale of

industrial enterprises in Eastern Europe, transportation system in Britain, timber rights all over the world, and off-shore oil leases.

Auction of spectrum rights worldwide - US, Europe, and even India.

Internet auctions of consumer goods (amazon.com, ebay.com etc.). Google's Adword auctions. Procurement auctions - freemarkets.com (now Ariba), GM and IBM's sourcing solutions.

The item being sold is initially offered at a very high price.

The price is lowered in decrements until a bidder accepts it.

Bidder who accepts the current price wins the auction

pays that decided price for the item.

PROCESS

EXAMPLEsuppose a business is auctioning off a used

company car the bidding may start at $15,000. The bidders will wait as the price is

successively reduced to $14,000, $13,000, $12,000, $11,000 and $10,000.

When the price reaches $10,000, Bidder A decides to accept that price and, because he is the first bidder to do so, wins the auction and has to pay $10,000 for the car.

Dutch auction is not a Second item Auction

Dutch Auction A Second Item Auction

Seller offers one time at a time to sale.

Only one bidder can win. Winning participant

pays the last announced price.

A sale requires only one bid.

Seller offers more than one identical items for sale.

Winner can be more than one.

All winning bidders need to pay only the lowest qualifying (successful) bid.

A sale requires more than one bid.

ANOTHER PRICE MECHANISH

DUTCH AUCTION IPO’S

The “Dutch auction” is another mechanism for an IPO Nor many do this Most famous: Google, August 2004

Dutch Auction Seller announces total shares to be

auctioned (Qshares) Potential buyers submit bids for (Shares,

Prices) Auction moves price down until Shares demanded above this price =Qshares

Dutch Auction ExampleQshares = 10Bids

2 at $10 1 at $9 3 at $8 4 at $7 2 at $6 4 at $5

Sell 10 to first 4 bidders at price = $7

Dutch Auction Picture

DEMAND

SHARES OFFERED

IPO price

DUTCH AUCTION SHARE REPURCHASEs It is introduced in 1981.

 allows firms an alternative to the fixed price tender when executing a tender offer share repurchase.

It offer specifies a price range within which the shares will ultimately be purchased.

The purchase price is the lowest price that allows the firm to buy the number of shares sought in the offer.

THE END

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