When Unity Technologies went public last year, it took a different approach than most other companies.
Rather than hop on the special purpose acquisition company (SPAC) bandwagon that involves negotiations with a single buyer, or use a traditional IPO process in which the lead underwriters set the initial offering price and allocate shares to investors, the company opted for a hybrid auction approach, and its finance chief couldn’t have been happier.
“It worked great,” Kim Jabal, CFO of the gaming development platform company, told Quartz.
The reason for the upbeat assessment is two-fold. First, it led to initial pricing that Jabal felt was closer to the company’s market value, which translated into more capital going to the company rather than to investors who benefit from the “pop” that commonly occurs with tech companies. And second, Unity’s employees were able to realize gains from the initial offering without having to wait, as they do in a traditional IPO, until a 180-day window had passed.
“Normally the liquidity for newly priced shares comes from hot-money hedge funds that quickly dart in and out of markets,” the Quartz report said. “In the Unity deal, that buying and selling was lubricated by employee shares.”
Hybrid auction IPOs aren’t new but they’re gaining traction, in the same way as SPACs and direct listings, as companies look for alternative ways of going public.
SPACs are deals involving a publicly traded blank-check company that negotiates a merger with a private company and takes it public. A direct listing is an IPO in which the company goes public independent of an underwriter, relying instead on a banking advisor that doesn’t have the same kind of financial stake in the company.
The hybrid auction approach differs from more traditional auction IPOs, sometimes referred to as Dutch auctions, mainly in how the shares are allocated once investors have submitted their bids.
Under a regular auction IPO, the shares are allocated under a formula among companies that bid above the threshold level; under the hybrid approach, the listing company takes the lead with the help of its underwriter in selecting the share allocation among eligible bidders.
“The hybrid process has been described as ‘bidding like an auction and allotment like a traditional deal,’” Andrew Bary of Barron's said in a Financial Freedom and Education post.
The traditional auction hasn’t seen much use in recent years, possibly because of the mixed results Google saw when it used the process for its IPO in 2004.
Google had hoped to sell 25.9 million shares at a price between $108 and $135, but once the bidding process got underway, it ended up selling 19.6 million shares at $85 each.
“Obviously, what the founders thought the company was worth didn’t exactly match what the public was willing to pay,” Bob Pisani said in a CNBC report.
It can’t be known how much of a difference it would have seen had it used the hybrid approach.
What’s clear, though, is that the hybrid auction would have given it more control over which bidders ultimately walked away with shares.
When ACV Auctions, an online used-car dealer trading platform, went public in March using the hybrid approach, it was able to price its offering of 16.55 million shares at $25 a piece, more than the $20-$22 range it was expecting.
Bill Zerella, ACV's CFO, said he liked the approach because the bidding gave the company a clear idea of investor demand and the allocation method didn’t leave it reliant on a formula.
“It’s…a modification that gives you a little more visibility into investor appetite at different levels of [the] valuation,” he told The Wall Street Journal.
Two other companies that have used the hybrid method in recent years, Airbnb and DoorDash, also had positive results.
Putting share allocation in the hands of the listing company is a big reason companies like the hybrid auction, Brian Hirsch, co-founder and managing partner at Tribeca Venture Partners, told The Wall Street Journal. Tribeca is one of ACV’s initial investors but didn’t bid on shares in the IPO.
The share price for Airbnb, which went public in December last year, skyrocketed 112% in its public market debut, giving the company a market cap of $86.5 billion, CNBC reported. And DoorDash, which also went public last year in December, priced its initial offering at $102 a share, above its expected price range of $90 to $95 a share, Barron’s reported.
The approach isn’t without risk, especially for smaller companies without Airbnb's and DoorDash's high profile. Institutional investors, if they’re convinced the IPO will generate little bounce after the offering, might decide not to participate, even if they submitted a bid, Jeff Cohen, a partner at Linklaters LLP, told the Journal.
But for companies that have confidence in their business model, hybrid auctions are an approach worth considering.
"We had a good business model, a good story, we felt reasonably confident,” Jabal told Quartz.