The hot Airbnb and DoorDash initial public offerings due to come this week will use a hybrid auction mechanism that is designed to result in a deal pricing that gets it closer to market pricing. It is intended to address growing criticism from Silicon Valley and elsewhere that companies get shortchanged in the IPO process.
With the hybrid auction, institutional investors need to submit through an electronic portal the quantity of stock they are willing to buy and the prices that they are prepared to pay. Such a process was used in September as part of the IPO of Unity Software (ticker: U), a maker of tools for videogame development. That IPO was led by Goldman Sachs.
The home-sharing travel upstart Airbnb, which will trade under the ticker ABNB, plans to sell as many as 56.5 million shares in a projected range from $56 to $60 a share, with the range lifted Monday from $44 to $50 a share.
DoorDash plans to sell 33 million shares in an projected range from $90 to $95 a share. The DoorDash shares, which will have the ticker DASH, are expected to be priced on Tuesday, and Airbnb’s on Wednesday. Morgan Stanley is lead underwriter for Airbnb, while Goldman is lead underwriter for DoorDash.
With both deals, the underwriters and the company will set an IPO price and only those investors who bid at, or above, that price will be allocated stock. The companies will determine which investors in that group get stock. This means that big, powerful investors like Fidelity and BlackRock could be shut out of both deals if they don’t bid sufficiently high.
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In a true Dutch auction, like the Google IPO in 2004, the price is set high enough that winning investors get a full allocation, or a pro-rata allocation. The hybrid process has been described as “bid like an auction and allocate like a traditional deal.”
Say the Airbnb IPO price is set at $60 and there are bidders for 113 million shares at or above that price (twice the deal size), then the company in consultation with the underwriters led by Morgan Stanley will decide which of those investors get allocated stock.
The benefit to Airbnb is that it gets to control which investors get stock with companies historically favoring those investors who they believe will be supportive long-term holders rather than those who will flip deals for a quick profit. Some investors who bid above the clearing price may get a full allocation and others could get shut out completely.