December 20, 2007
Netsuite takes the Wall Street tiger by the tail
Full marks to Larry Ellison (not to mention Credit Suisse and WR Hambrecht) for their management of the Netsuite IPO, but it seems that sometimes you just can’t plan for Wall Street’s apparent irrationality.
This had all the makings of one of those headline-grabbing IPOs that leaves a company’s early shareholders with an uncomfortable feeling that they have somehow been short-changed. The bankers come up with a price that is meant to give the stock a comfortable ride in the after-market, only to see trading go through the roof. Initial investors are left to wonder how much money was left on the table (this summer’s VMware IPO was the most glaring recent example.)
It seemed that the Dutch auction format used for the Netsuite IPO was going to iron out that effect. In recent days the indicated price range was raised twice, from an initial $13-16. The shares were eventually priced on Wednesday at $26 each. This is a company that is far smaller than Salesforce.com, which has grown far slower than Salesforce.com, and which has yet to prove its business model works - yet the pricing was at a significant premium to Salesforce.com on any measure you care to take.
It looked as though Ellison, CEO of Oracle and controlling shareholder of Netsuite, had called the IPO traders’ bluff. If they wanted to bid up the auction to a dizzy level to assure themselves of an allocation, he was not above hitting the bid and taking the money. When the shares opened on Thursday they settled just above the issue price, despite very heavy trading. Any premium had seemingly gone to the company and its early investors.
So how to account for what happened in the last two hours of trading? Netsuite’s shares eventually drifted all the way up to $35.50, to yield a significant first-day "pop." It seems that, with a shortage of shares in the IPO, there’s just no way to handle the weight of money looking for a home in the "software-as-a-service" sector (Salesforce was also up 8 per cent Thursday.) But when the lock-up ends and Netsuite insiders get to unload more of their shares it should be a different story.
