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Bouquet of a Dutch auction
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April 4, 1999: 8:07 p.m. ET
Winery to be first offering by online banking firm using novel approach
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SAN FRANCISCO (The Red Herring) - This week, W.R. Hambrecht & Co. plans to launch the first ever IPO using what is known as a "Dutch auction."
W.R. Hambrecht is a new age online banking firm founded by Bill Hambrecht, who also co-founded the San Francisco-based investment bank Hambrecht & Quist.
During the week beginning Monday, the online banker expects to price one million shares of Ravenswood Winery (proposed symbol: RVWD) via an open bidding system. The final terms of the offering will be announced at that time.
In a Dutch auction, the potential investors set the terms of the deal by placing actual bids ahead of the offering date.
During the subscription period, investors place their bids with members of the selling group for the number of shares they want and the price they are willing to pay. When the subscription period ends, the managing underwriter tabulates the bids and re-offers the stock to the bidders at the highest price at which all shares are spoken for.
The Dutch auction has been in place for years and is used extensively for the resale of U.S. government securities. The issuer is the Treasury Department and the underwriters are the select few bankers designated by the Federal Reserve Bank of New York. Currently, there are 30 primary dealers acting as the Uncle Sam's investment banker.
To the best of some old-timers' memory, the Dutch auction was used only one time to underwrite corporate debt. That was in the mid-1980s; it caused so much confusion among underwriters and buyers that the system was dropped.
Bang for the buck
There are two stories in the Ravenswood offering: the deal itself, and the process.
The deal is a winery company. Without a ".com" after its name, it shouldn't be expected to soar in the aftermarket.
The process is another vintage altogether.
The issuer -- in this case, Ravenswood -- can see big savings in coming to market with an online investment bank like W.R. Hambrecht.
The banking firm estimates the cost of the gross spread (management, underwriting, and selling fees) should run between 3 and 4 percent of the total amount raised, vs. a normal expense of 7 percent, or even 10 percent in the case of small-cap deals.
Also, little money is "left on the table" in this type of Dutch deal, unlike what happens with some Internet IPOs like Theglobe.com (TGLO). That underwriting was priced on Nov. 13 at $9 per share and opened at $90. Had the underwriter raised the pricing to even $18 per share, the company could have raised twice as much cash.
For investors, a Dutch auction is "come one, come all." Everybody is welcome to play -- institutions and individuals alike. All are equal in the eyes of the banker running the Dutch auction. Place your bid and, if it is high enough, you get shares in the IPO at the offering price.
A syndicate manager of a regional firm says, "This will take a lot of steam out of the market on the upside."
He adds, "In the beginning, it could produce a volatile market. Everybody will be players, institutions and individuals. With the right stock, the process could be very interesting. With the wrong stock, well. ..."
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