Definition - What does Dutch Auction mean?
A Dutch auction is a price discovery process during which the auctioneer starts with a high asking price and then lowers it in stages until the cumulative bids received cover the entire offer quantity. This type of auction is used for IPOs to discover the optimum price for the full quantity of stock issued by a company. In this process, it is possible to sell the intended quantity at a competitive price, which is discovered by the forces of supply and demand. This auction is also used by government agencies for the public offer of treasury bills, notes and bonds.
A Dutch auction is also known as a descending price auction or uniform price auction. Google used a Dutch auction to price its share when it went public in 2004.
Divestopedia explains Dutch Auction
A Dutch auction often starts at a very high initial price and then has to be dropped considerably, before it reaches a level where the cumulative quantity accepted by bidders covers the entire quantity offered for sale. The descending price nature allows a large number of individual bidders to buy small quantities of stock at a price determined by the auction process. Some companies use this method to buy back shares from the shareholders.
There is also a reverse Dutch auction in which a single buyer invites bids, beginning at a very low level and then raises the bid price so as to attract a number of sellers. The price is raised to a level where sellers, cumulatively, are able to offer the required or planned quantity.
Although this auction method is more typical for pricing stock during an IPO, it can demonstrate to a private business owner that there are many different ways to conduct an auction. Entrepreneurs looking to engage an investment banker to sell their businesses should test their knowledge of different auction types available to garner the highest price.