Question

You just started at a new position at a large investment bank. You have been assigned to help a senior analyst, Ms. Jones, on a Dutch Auction of shares for Thornton & Danaher Inc. The equity of the firm is currently closely held by the founding families and the senior managers, so there is no available market price. They are hoping to raise about $315,000,000. This represents about 25% of the firm’s current equity value. Ms. Jones has estimated that the firm equity is currently worth about $1,250,000,000 ($315,000,000 is about 25%). Of course, this is just an estimate, and the amount raised will depend on what the market will bear. They have decided to auction 9,135,000 shares, which will hopefully sell for about $35 per share. Thornton & Danaher will receive the proceeds from the sale of 9000,000 of the shares, and your investment bank will receive the proceeds from the remaining 135,000 shares (a 1.50% commission). Your firm pitched the issue to several large private equity clients. Fourteen sealed bids were submitted, and you have sorted them by bid price. The results are shown below.

Bidder Price Shares:
A $46.43 625,000
B $45.87 620,000
C $45.12 650,000
D $43.93 700,000
E $41.73 860,000
F $40.37 1,020,000
G $38.12 1,330,000
H $36.54 1,480,000
I $35.37 930,000
J $34.42 1,455,000
K $33.14 1,400,000
L $32.52 1,480,000
M $30.73 1,600,000
N $29.28 1,830,000

What marginal price will the 9,135,000 shares of Thornton & Danaher sell at in the Dutch Auction? Also, calculate the pro rata portion of shares that the winning bidders will receive for the number of shares they bid.

How much money will Thornton & Danaher receive from the auction? What will your investment bank receive?

Answer 1

In Dutch Auction pricing share price determine when the offered share is fulfulied at a certain price. Price at which all offered share bid is a cutoff or marginal price in Dutch Auction

Ans1) Marginal price will be $34.42 because at this price all shares are covered. At this price no. of share count is 9670000.

Ans 2) Pro rata portion of shares for successful bidder = 9135000/9670000 = .94467425

Ans 3) Money Thornton & Danaher will receive from the auction = 9000000*34.42 = $309,780,000

Money that Investment bank will receive = 135000 * 34.42 = $4646700