Issue 11- December 16, 2003

This week’s newsletter focuses on the changing face of auctions: eBay, The US Treasury, and Initial Public Offerings. With the myriad forms of conflict and corruption recently brought to light, we wanted to explore possible changes in the auction format that might take place in the coming year, specifically with regard to Initial Public Offerings.

eBay: Home of the Dutch Auction

eBay may have perfected the modern day “Dutch Auction” process. A true Dutch Auction begins with the auctioneer setting an extraordinarily high level on the merchandise he or she is moving, followed by a continuous reduction in price until a level is found which clears the market of all the goods. Conversely on eBay, sellers who have products to sell begin by setting a starting price that buyers bid up until the selling time expires. The selling price is the highest bid that clears the market of all the merchandise. The common theme in either event is that market participants, not the seller or an auctioneer, determine the selling price and all buyers receive the same price.

US Treasury: Non-Competitive and Competitive Tenders

When it comes to the auctioning of US Government Debt, the Treasury allows for two distinct types of bids, non-competitive and competitive. In bidding for Bills, Notes, or Bonds on a non-competitive basis, you are guaranteed you will receive the bonds you want; however those participating on a competitive basis set the price. Conversely, those bidding competitively may not receive the allocation they hope for, but they will have specified the yield that is acceptable to them. Practically speaking we see that most individual buyers place non-competitive bids, while most dealers bid competitively. There are limits to any allocation in either form of bidding. Individuals may not bid for more than $1mm of any one Treasury Bill Auction or more than $5mm of any one Treasury Note Auction. The limits for the competitive process are provided in each auction announcement, but 30% represents a typical limit. If you would like to read more about Government Auctions please go to or .

Initial Public Offerings: A Process Ripe for Reform

Unlike eBAY or the US Treasury, the allocation of shares for Initial Public Offerings is far from being a streamlined auction process. It begins with the establishment a management group to lead the placement process. Over the course of several months, they comply with all regulatory filings, provide informational investor summits or “Road Shows” and take “indications of interest” or desired share amounts from brokers on behalf of their clients. The culmination of this process results in a final pricing and allocation fistfight.

Now why wouldn’t Corporate America demand the same level of efficiency as an eBay participant or more appropriately, the US Treasury? The primary answer is that it did not have the choice. Broker-dealers have maintained this fairly antiquated system under the rational that IPOs are not commodities and they require the human element to ensure fair distribution and pricing to all parties. However, this argument was severely undermined when Elliott Spitzer recently collected multi-million dollar fines from every major Wall Street firm for a process known as “Spinning” where large allocations were made to certain investors in return for prearranged secondary trades with oversized commissions.

Consider further, the plight of the selling shareholders. For the privilege of selling shares through this process, they pay 7% of the total gross proceeds to the underwriters. 7%?! To further add insult to injury, if their IPO turns out to be a “hot deal”, the owners of the company have sold their shares of stock at a level well below what the market would actually pay.

Although no auction process is perfect, it is hard to imagine that some variation of the previously discussed auctions, competitive or non-competitive, Dutch or Fixed Price, won’t begin to make its way into the IPO process. A major catalyst for this could be on the horizon. It is rumored that the highly anticipated IPO of 2004, Google, may be leaning toward some sort of auction mechanism. We will keep you posted.

Happy Holidays!

In this Edition

  • Auctions - eBay, US Treasury, IPOs

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues
10- 12.02.03
Recent Economic Data
Market Implications

9- 11.14.03
Importance of Housing
Rising Debt and Equity

8- 10.31.03
3rd Quarter GDP

7- 10.15.03
Private Equity

6- 10.02.03
Stimulus/Bear's Last
"At Bat"

5- 09.15.03
Hedge Funds

4- 09.03.03
Econ Highlights/Bluetooth

3- 08.15.03
Tirade on Bonds/ Modern Portfolio Theory

2- 08.01.03
Econ Data/Asset Allocation

1- 07.15.03
Economy/Rates & Currencies


Market Highlights



9/30/03 6/30/03 3/31/03 12/31/02
DJIA US 10022.8 9275.06 8985.44 7992.13 8341.63
S&P 500 US 1068.04 995.97 974.5 848.18 879.82
Nasdaq US 1918.26 1786.94 1622.80 1341.17 1335.51
EAFE Int'l Equity 1240.05 1103.39 1025.74 868.55 952.65
5 Yr Treasury 3.190 2.865 2.41 2.71 2.74
5 Yr AAA Muni 2.48 2.300 2.17 2.50 2.59
10 Yr Treasury 4.224 3.932 3.52 3.80 3.82
10 Yr AAA Muni 3.640 3.670 3.30 3.75 3.72
30 Yr Treasury 5.030 4.857 4.56 4.82 4.77
30 Yr AAA Muni 4.58 4.680 4.50 4.66 4.69
EUR Currency 1.2218 1.1686 1.1425 1.0899 1.0488
JPY Currency 108.05 110.36 120.06 118.67 118.69
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