Here’s how the Dutch auction works. The auction agents (underwriters, if you wish) collect the bids from “qualified” investors and set the “clearing price” at the highest bid it takes to sell all of the shares.
That doesn’t mean the IPO will be priced there.
The agents have been leaving themselves some wiggle room to offer their deals below the clearing prices, hence a “modified” or a “dirty” Dutch auction. That leaves orders on the table and the amount of shares given to the winning bids are pro rated -– like in the case of the 2004 Google (GMS: GOOG) offering.
And boy, did Google pop.
Google Me This
On Aug. 18, 2004, Google offered 19.6 million shares at $85 each. Winning bids received about 75 percent of their indications, according to published reports. That left about 25 shares out of every 100 on the table. The IPO opened at $100.01 per share, traded 22.4 million shares and closed its opening day at $100.34, UP $15.34 per share or UP 18 percent from its initial offering price.
There is no available information as to what Google’s clearing price was. In a more recent Dutch auction, however, the clearing price was revealed.
Interactive Brokers Group (GMS: IBKR) was another example of the Asian/European “dirty” Dutch auction or “modified” Dutch auction American style.
On May 3, 2007, Interactive offered 40 million shares at $30.01 each. The clearing price was $33 per share. And where did the deal open?
At $33 per share, its clearing price.
The IPO traded 23.5 million shares and closed its opening day at $31.30, UP $1.30 per share or UP 4.3 percent from its initial offering price.
A Dutch Auction Snapshot
The Dutch auction bidding system for IPOs has been widely used for decades in Asia and Europe, according to published reports. It made its U.S. debut in 1999.
The first was the April 1999 offering of RavensWood Winery. Including that deal, there have been only 21 offerings through U.S. Dutch auctions, according to Securities and Exchange Commission filings. The method has not been widely popular.
They have accounted for less than 1 percent of all IPO traffic in the United States from April 19, 1999, through Aug. 1, 2008. Bankers have priced about 2,196 IPOs.
And their opening-day gains rarely turn any heads. Of the 21, five closed BELOW their initial offering prices, one was unchanged and the mean average of all 21 opening-day gain was 1.25 percent.
On the Launching Pad
This week, the American bankers will have another go at a Dutch auction, with the offering of Rackspace Hosting (NYSE: RAX proposed). But there are two other deals on the IPO calendar. They are: China Mass Media International Advertising (NYSE: CMM proposed), a carry-over from last week that has been cut down in size, and Rhino Resources (NYSE: RNO proposed). They expect to raise $432 million.
China Mass Media (NYSE: CMM proposed), a Beijing-based television advertising company, now plans to price 7.2 million shares at $6.80 to $7.80 each to raise $52.6 million. The deal was cut from 14.4 million shares at $5.20 to $7.20 each to raise $89.4 million. The deal is expected to be priced Monday morning and to trade later that day.
Rackspace Hosting (NYSE: RAX proposed) is a San Antonio-based Web hosting provider delivering managed services to businesses. It has more than 14,000 customers in eight data centers worldwide.
Rackspace plans to price 15 million shares at $12 to $16 each to raise $210 million. The company plans to offer 12.7 shares and selling shareholders plan to offer 2.3 shares. The IPO is to start trading on Friday, Aug. 8, 2008.
For the year ending December 31, 2007, Rackspace reported net income of $17.8 million on net revenues of $362.0 million, compared with net income of $19.8 million on net revenues of $224.0 million for the same period a year ago.
For the three months ending March 31, 2008, Rackspace reported net income of $5.4 million on net revenues of $119.6 million, compared with net income of $4.2 million on net revenues of $75.2 million for the same period a year ago.
Formed in 1998, Rackspace has about 2,254 employees.
Underwriters: Goldman Sachs, Credit Suisse and Merrill Lynch are the joint-lead managers. Acting as co-managers are WR Hambrecht + Co., Jefferies, Cowen, RBC Capital Markets, JMP Securities, Signal Hill and E*TRADE Securities.
Dow Jones U.S. Technology Index (Chart)
The Dow Jones Internet Services Index (Chart)
Note the following from the prospectus:
“The Pricing Process … However, we and our underwriters have discretion to set the initial public offering price below the auction clearing price.”
Rhino Resources (NYSE: RNO proposed) is a Lexington, Kentucky-based limited partnership formed to control and operate coal properties and related assets with coal reserves in Central Appalachia, Northern Appalachia, the Illinois Basin and Colorado.
Rhino Resources plans to price 10 million shares at $16 to $17 each to raise $170 million. The company plans to offer 5.5 million shares and selling shareholders plan to offer 4.5 million shares. The IPO is expected to start trading on Friday, Aug. 8, 2008.
For the year ending December 31, 2007, Rhino reported net income of $30.7 million on total revenues of $403.5 million, compared with net income of $31.7 million on total revenues of $364.0 million for the same period a year ago.
For the three months ending March 31, 2008, Rhino reported net income of $11.3 million on total revenues of $111.0 million, compared with net income of $9.5 million on total revenues of $101.6 million for the same period a year ago.
Rhino Resources expects to pay quarterly dividends initially at an annual rate of between 2 cents and 4 cents per share.
Formed in 2003, Rhino Resources has about 1,000 employees.
Underwriters: Morgan Stanley and Lehman Brothers are the joint-lead managers. Acting as co-managers are Raymond James, RBC Capital Markets, Stifel Nicolaus, Wachovia Securities, Dahlman Rose, Davenport, Friedman Billings Ramsey and PNC Capital Markets
The Dow Jones U.S. Basic Materials Index (Chart)
The Dow Jones US Coal Index (Chart)
And there you have it.
There is only one deal on the calendar for the week of Aug. 11. And then the IPO market slips into its end-of-the summer hibernation that runs through Labor Day to mid-September.