The voguish, highly-anticipated Airbnb and DoorDash IPO’s are due to take place this week. Both will use a hybrid auction mechanism designed to result in pricing that gets it closer to market pricing. Ultimately, its purpose is to address growing denunciation from Silicon Valley and companies that got shortchanged in the process.
In a hybrid auction, institutional investors are to submit through an electronic portal the amount of stock they’re willing to buy at the prices they’re prepared to pay. This approach was last taken in September as part of the Unity Software IPO [$U], led by Goldman Sachs. The home-sharing travel startup Airbnb [$ABNB Airbnb IPO: The Hype is Real] is set to sell as many as 56.5 million shares in a projected range from $54 to $60 a share. The previous range was bolstered Monday from $44 to $50 a share.
DoorDash [$DASH Who Really Owns DoorDash?] plans to sell 33 million shares ranging from $90 to $95 a share. Shares are to be priced on Tuesday, and Airbnb’s on Wednesday. Morgan Stanley is lead underwriter for Airbnb, while Goldman is the lead for DoorDash. In both deals, the company audits underwriters will set an IPO price and only those investors who bid at, or above, that price will be recieve stock. The companies will govern on which investors in that group get stock, meaning bigwig investors like Fidelity [$FNF] and Blackrock [$BLK] could be squeezed out of both deals if they don’t bid high enough.
In true Dutch auction fashion, à la the Google IPO in 2004, the price is set high enough that winning investors get a pro-rata allocation. The hybrid process has been described as “bid like an auction and allocate like a traditional deal.”
Suppose 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.
By getting information on what investors are willing to pay for stock, the Airbnb and DoorDash shares could be priced closer to where they will trade the first day. The process isn’t infallible. Unity priced its September IPO at $52 a share, it rose 32% on the first day to $68, and now it trades over $150.
Traditionally, in the IPO underwriting mechanism, investors pin a price target and a quantity, within the range and below it, but not above the range. This caused a stir for the company and the underwriters to prognosticate demand above the range. With tech IPOs generating massive demand, this can help create a situation where an IPO is priced low and then goes parabolic in its first day of trading.
Venture capitalist Bill Gurley of Menlo Park’s Benchmark has been a harsh critic of the IPO process regularly arguing that companies and their employees get fleeced when IPOs are priced too low and that wealth is funneled to institutional buyers. “The traditional way of going public is systematically broken and is robbing Silicon Valley founders, employees, and investors of billions of dollars each year,” Gurley wrote in August. He noted that first-half 2020 IPOs were underpriced by an average of 31% based on their first-day closing price for a total amount of about $8 billion.
By urging investors to specify what price they’re willing to pay, the companies will get a more lucid idea of demand and be able to set a fair IPO price, and potentially leaves less money on the table for the lucky investors that get allocated stock.