Going once, going twice – going public
It’s not too long ago that the IPO was the only mainstream route to market for private companies in the US, although, in recent years, direct listings and special purpose acquisition companies have taken a sizable share of that pie. For a small number of companies, however, there’s a fourth option: a modified auction.
This was the method chosen by Google in 2004, but it didn’t catch on – at least, not until September 2020, when Unity Software revived it. It was then used again in December 2020 by Airbnb and DoorDash. But what exactly is a modified auction?
It is a method of accessing the public markets that ultimately gives the company greater control about who its shareholders turn out to be. Unlike in a traditional IPO – where the underwriting banks set the price and identify the investors – a modified auction allows a company to set an opening price range and then ask investors to place bids for a specific number of shares at different prices.
‘We wanted to have agency over the allocation of our stock,’ Richard Davis, vice president of investor relations and strategy at Unity Software, tells IR Magazine. ‘The reason is that we wanted to put the stock into the hands of people who cared about the company and we were trying to optimize for long-term partnerships.’
Davis joined the company five months before the IPO and brought 28 years of sell-side experience with him. While the decision had already been made to pursue a modified auction by the time he joined, he was tasked with explaining the auction process to Unity Software’s potential investors.
‘It was a 25 mn share deal,’ Davis says. ‘So we asked everyone to tell us exactly what they wanted – such as, for example: I want to buy 1,000 shares at $40, another 200 shares at $42, another 50 shares at $55 and then no more after that. Probably 70 percent of the people figured it out, but then we had other accounts that bid 2.5 mn shares and we’re looking at it and thinking, wow – that’s a lot of shares.’ It placed a heavy onus on upfront communication, Davis explains. ‘When you do an auction like that, you’re not allowed to tip your hand,' he says. 'It’s like you’re playing cards. The rules are that you can’t call someone up and encourage them to move their bids down or up because that would muddy the auction process.
'That can definitely emerge as a risk because if you don’t properly communicate your value proposition, you could have people miss the bidding, bid too low or bid too high.’
While this approach clearly puts more power in the hands of the company that’s listing, Unity Software still worked with Goldman Sachs, Credit Suisse and William Blair to help manage the process. ‘The bankers were incredibly helpful to us in positioning the story, messaging and thinking about our key metrics,’ Kim Jabal, Unity Software’s CFO, told online business information platform Quartz last year.
Once the auction closed, Davis says the fun part began: setting the price and seeing how upward or downward movement changed the shareholder base. ‘It was a really fun day, other than the fact that it was 19 hours long,’ he says. ‘We had a system Goldman built for us where you could slide the price back and forth and watch people drop off and on and see how much oversubscription there would be.’
Part of the motivation behind the auction was that Unity Software wanted to give non-executive employees a way to participate in the listing by selling up to 15 percent of their vested shares – rather than having to wait the traditional 180 days.
Ultimately, the price was set at $52, the first trade was at $75 and it closed its first day of trading at $68. During a year of massive first-day trading pops, Davis says Unity Software’s 30 percent price range between start and finish ‘was perfect – good but not ridiculous.’
