A Dutch auction is when a company agrees to buy back a fixed amount of its outstanding shares within a certain price range.
Offers come in from investors who specify the price within the given range at which they'll sell their shares. The company then buys back the shares of those who bid the lowest first and continues on up the line until they have bought back the amount that they said they would.
It frequently works the other way, too. Some companies do secondary offerings by Dutch auction, lowering their ask until they hit a price that meets enough bids to cover the deal, giving everyone that price. In a Dutch auction, a company commits to buy a certain amount of shares, raising its bidding price until the bid is equal to or higher than a number of offers that they need to meet the full purchase amount. All shares are then bought at this price, despite the fact that offers were entered at a price less than the final one. Dutch auctions are more commonly used by companies selling shares to raise capital, but the concept is the same.
Recent Mentions on Fool.com
- Proration: Getting Your Fair Share of a Deal
- 7 Ways to Profit From the Next Era in Offshore Drilling
- 3 Reasons Amgen, Inc.'s Stock Could Rise
- Violence in Iraq Threatens ExxonMobil's Growth but Not Current Production
- This High-Impact Oil Project Could Change the Future of the Gulf of Mexico
- Why I'm Avoiding Taro Pharmaceuticals