So Much For Efficient Pricing: Auction-Priced NetSuite Shares Still Surge

from the rationality-is-a-myth dept

I’ve always been a fan of the idea of a dutch auction IPO — where the price is set via an auction rather than some investment bankers picking a price based on what they’ve heard from institutional investors. When bankers just set the price, it tends to lead to companies leaving money on the table, as the banks price the stock too low in order to get the publicity of a first day “pop.” While some of that pop is reasonable, the size of some of them suggest that the company threw away many millions of dollars for no good reason. An auction, in theory, solves that by making the price more explicitly set on the market (though, there are some who make compelling arguments about the problems the auction model has as well). For the most part, it was smaller, less well known companies that tried to use Dutch auctions for IPOs — but the concept got a lot of publicity when Google IPO’d using a Dutch auction. Of course, many investment banks were so freaked out about it that they starting spreading FUD about Google. That didn’t work out so well. However, many other companies have still been scared off from using a dutch auction, in some cases probably costing the company millions.

That’s why it was nice to see NetSuite become one of the few “hot” companies to also go Dutch auction with its IPO. Yet, with the shares pricing last night and hitting the markets today, there was still a significant first day pop (though, it started the day heading down rather than up). While this definitely worked out well for NetSuite, it does raise some questions about the dutch auction process. It still seems like a much more efficient way to price IPOs than an investment banker picking the price — but it’s pretty clear that there are many other factors that go into how investors actually treat a stock once it hits the market.

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Companies: netsuite

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