Dutch auction for S&S Air

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(a0 The key difference in the expenses to S&S Air if it uses a Dutch Auction versus a traditional auction is that of the underwriting fees. According to M5-2, in a Dutch Auction underwriting, a fixed price is not set by the underwriter but he conducts an auction in which the investors bid for shares (a). The key difference in expenses to S&S airlines is the underwriting fee of 7 percent. In a Dutch auction, the underwriter is not expected to conduct a roadshow where institutional investors are provided with the details of the S&S Air so that they may invest in the IPO of the company. This cost is now eliminated. Now, the underwriter does not have to find institutional investors, he does not have to conduct a roadshow, nor does he have to make "inquiries" for setting the price of the shares. He simply has to conduct an online Dutch auction in which the investors bid for S&S Air shares. When the auction closes, the list of bidders appears in descending order of price bid the underwriter simply has to hand over the list to S&S Air. S&S Air may avoid the undertaker altogether. If S&S Air raises $90 million the undertaker fee at 7% is $6.3 million (b). This cost can get eliminated and if S&S Air chooses to use the services of the underwriter, the cost will be far less than the 7%. Also, an important cost is the price of the shares during the IPO. The underwriter typically undercuts the price of shares and sells it in bulk to institutional investors. Also, as S&S Air is not a very large airline the institutional investors will demand a lower price for the shares. However, if S&S Air uses a Dutch Auction, it can get a higher price for its shares based on shareholder perception of its performance and potential. It can get more cash by selling fewer shares. S&S Air should go in for Dutch auction because not only is the process more efficient and fair, it also reduces the cost of the IPO and has the potential of placing more cash in the hands ...