What is a blind bid pool of stocks purchase?

A blind bid pool of stocks purchase happens when someone buys a group of stocks together without knowing exactly which companies they are buying. The person selling the stocks gives some basic info about the total value and trading volume of the stocks. This allows people interested in buying to offer a price that is usually lower than the current market price of the stocks.

Why companies sell stocks this way

Companies sometimes sell stocks as a blind pool because they want to raise money quickly without letting everyone know which stocks they are selling. This could be because the company needs cash fast or they don’t want to hurt the stock price of specific companies by announcing they are selling those stocks.

What info sellers provide

When a company sells a blind pool of stocks, they give potential buyers a few important numbers:

The total market capitalization (the value of all the stocks in the pool)
The daily trading volume (how many of the stocks are bought and sold each day)
Sometimes the general industries of the companies (like tech, healthcare, etc.)

But they do not tell buyers the exact companies or the exact number of shares of each company in the pool. Buyers have to estimate the value based on the limited info.

How buyers decide what to offer

Buying a blind pool of stocks is riskier than buying stocks the normal way because buyers don’t have all the details. So buyers usually offer a discounted price compared to the current market value of the stocks.

Figuring out the discount

To decide how big of a discount to ask for, buyers look at the basic info provided by the seller and make some assumptions:

They guess how many companies might be in the pool based on the total value
They assume the pool includes a mix of both high-value and low-value stocks
They consider economic conditions and whether stock prices are generally going up or down

Based on these educated guesses, buyers build in a buffer in case their estimates are wrong. This buffer is the discount.

Example of a blind pool bid

Pretend a company is selling a blind pool of stocks worth $100 million total with a daily trading volume of 10 million shares. A potential buyer might estimate the pool contains 30-50 different companies, with a mix of big and small firms.

The buyer wants to protect against the risk that many of the companies are small and their stocks are not worth as much. So they might bid $80 million for the pool, a 20% discount to the market value. If the seller agrees to that discounted price, the buyer purchases the stock pool without ever knowing the exact contents.

Advantages of blind pooled stock purchases

Buying stocks this way has some advantages for the buyer compared to traditional stock buying:

Instant diversification

Purchasing a pool of mystery stocks allows the buyer to instantly own pieces of many different companies. This spreads out their investment risk. If one company in the pool performs poorly, the other companies can balance it out. The buyer doesn’t have to spend time researching and picking individual stocks.

Discounted price

Since the buyer is taking on more risk by purchasing stocks without full information, they usually get a discounted price compared to buying the stocks individually at market prices. This can allow the buyer to get more total stocks for their money, improving their potential returns if the companies perform well.

Easier sale process for large stock blocks

It’s often hard for companies to find a single buyer for a large block of shares, especially if they want to sell quickly. Packaging the shares as a blind pool makes it easier to find a buyer who wants the instant diversification. The company can sell all the shares in one transaction rather than trying to find buyers for each individual company’s shares.

Risks of blind pooled stock purchases

Buying a blind pool of stocks also comes with big risks for buyers:

Lack of control over holdings

The biggest risk is that the buyer has no control or choice over which company stocks they end up owning. The pool could contain stocks of companies the buyer thinks are weak or overvalued. It could include companies in industries the buyer wants to avoid for business or ethical reasons, like fossil fuels, gambling, or weapons. The buyer is stuck with whatever is in the pool.

Potential for overpaying

Even though blind pool buyers usually get a discount, there’s still a risk of overpaying if the estimates are wrong. If the pool contains more weak stocks than the buyer assumed, the true market value of the pool could be much lower than the price paid. The seller has more information and could take advantage of that edge.

Harder to sell pieces later

Packaging stocks into a pool makes the initial sale easier for the seller. But it can make resale harder for the buyer. If the buyer wants to sell off pieces of the pool later, like stocks they think are weak, they have to find an interested buyer. That can be harder than just selling a publicly traded stock on the open market. The blind pool buyer might have to offer their own discount and take a loss.

Real-world examples of blind stock pools

Blind stock pools are not common but they do happen occasionally, usually with large companies selling off major blocks of shares.

Porsche buys mystery Volkswagen shares

In 2008, German carmaker Porsche quietly bought a blind pool of Volkswagen shares as part of a takeover attempt. Porsche knew the shares were Volkswagen but other investors didn’t. This allowed Porsche to scoop up a controlling stake in its rival without driving up the stock price, a sneak attack.

Creditors unload Lehman shares after bankruptcy

When investment bank Lehman Brothers went bankrupt in 2008, its creditors ended up with big pools of stocks the bank had owned. The creditors wanted to raise cash quickly by selling off the shares but didn’t want to spook the market. So they offered the shares to buyers as blind pools at a slight discount to market prices.

Investors buy baskets of unknown mortgage bonds

During the housing bubble before 2008, investment firms sold baskets of mortgage bonds to investors without revealing details about the borrowers. Buyers thought they were getting a diversified pool but many pools were stuffed with high-risk sub-prime loans. When borrowers defaulted en masse it caused huge losses for investors and worsened the financial crisis