by David Shabelman
[Posted on December 20, 2007 - 4:46 PM]
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DiggMuch like overzealous Major League Baseball owners who fall over themselves when bidding on free agent players, investors were overzealous when given a chance to set the price on NetSuite Inc.'s initial public offering. But unlike the typical overpriced baseball free agent, the IPO actually lived up to the hype, despite a slow start.
Shares of NetSuite were priced at $26 Wednesday night, double the low end of the $13 to $16 price range initially set by the company and still a substantial bump from the revised $19-$22 price range set by the company Wednesday morning. While the offer price helped match demand with supply, it didn't provide much upward impetus once the shares began trading Thursday on the New York Stock Exchange, and they closed up $9.50, or 36.5% at $35.50, after flatlining for most of the session.
NetSuite provides Internet-based software that helps small and midsize businesses manage their customer relationships and enterprise resource planning needs. Demand for such software-as-a-service technology is expanding rapidly as companies seek ways to cut the cost and administrative headaches associated with conventional "hosted" software. Oracle Corp. CEO Larry Ellison is a co-founder and majority owner of the company, adding to its hype.
NetSuite employed W.R. Hambrecht + Co. LLC's little-used Dutch OpenIPO auction process to set the price of the offering. The process seeks to level the playing field with individual and institutional investors by allowing each to bid on the price of the offering online, with all paying the same price. It differs from the traditional pricing method that is established by the company and its underwriters.
But the traditional IPO typically is priced below where the actual demand is so that there is a pop once the offering begins trading. The IPO often is viewed as a "gift" for institutional investors who do business with the investment banks throughout the year and want to maintain that relationship. In addition, there is an inherent risk in investing in a company that is just going public and is far from reaching its potential.
"It's difficult to make the transition from private to a public company, so you need to incentivize investors to come to the table," said Tom Taulli, founder of DealProfiles.com, an online service that tracks IPOs and mergers and acquisitions. "Often, the company isn't profitable, doesn't have a track record, and may have a new technology that has not been fully tested."
While an IPO is designed to reward investors, it often comes at the expense of the company, whose sole purpose in going public is to raise money for its business. Many companies end up leaving money on the table by setting a price too low in order to ensure a sizable gain once the stock begins trading.
NetSuite arguably got the most buck for its bang with the auction process. At $26 a share, the San Mateo, Calif.-based company raised $161.2 million, selling 6.2 million shares, though underwriters have an option to purchase another 565,000 shares of common stock at the $26 price. Had it been priced at $16, however, the company would have raised less than $100 million.
Paul Bard, vice president with Renaissance Capital LLC's IPOHome.com, said that from management's point of view, "it was a hugely successful offering" but did not leave much short-term upside for investors.
"The obvious takeaway is that when it comes to a hot offering such as NetSuite, and the bankers adhere strictly to the auction-based pricing mechanism, you get a situation where the first-day gain is much more muted," Bard said in an e-mail. "If the NetSuite offering was left up to the bankers and priced under the traditional method, I doubt they would have priced it as high as they did."
In its regulatory filings, NetSuite said the auction process aligns with its corporate culture and business mission.
"In the same way that our software application suite allows companies of all sizes to benefit from capabilities previously only available to large organizations, we are conducting this offering through an auction process to open participation in our initial public offering to all investors, both individual and institutional," NetSuite's prospectus said.
NetSuite was only the third company to use the open auction process this year. By far, the most celebrated IPO to use the auction format was Mountain View, Calif.-based Google Inc.'s offering back in 2004.
Steve West, David Hermer and Bill Brady of Credit Suisse Group served as lead underwriters for the offering. Michael Zigman, Bill Hambrecht and James Donohue of WR Hambrecht served as co-lead. E*Trade Securities LLC and JMP Securities LLC served as co-underwriters. Jeffrey Saper, Richard Kline and Damien Weiss of Wilson Sonsini Goodrich & Rosati PC represented NetSuite in the IPO. William Hinman, Caniel Webb, Nidhi Shah and John Delfino of Simpson Thacher & Bartlett LLP represented the underwriters.
Shares of NetSuite were priced at $26 Wednesday night, double the low end of the $13 to $16 price range initially set by the company and still a substantial bump from the revised $19-$22 price range set by the company Wednesday morning. While the offer price helped match demand with supply, it didn't provide much upward impetus once the shares began trading Thursday on the New York Stock Exchange, and they closed up $9.50, or 36.5% at $35.50, after flatlining for most of the session.
NetSuite provides Internet-based software that helps small and midsize businesses manage their customer relationships and enterprise resource planning needs. Demand for such software-as-a-service technology is expanding rapidly as companies seek ways to cut the cost and administrative headaches associated with conventional "hosted" software. Oracle Corp. CEO Larry Ellison is a co-founder and majority owner of the company, adding to its hype.
NetSuite employed W.R. Hambrecht + Co. LLC's little-used Dutch OpenIPO auction process to set the price of the offering. The process seeks to level the playing field with individual and institutional investors by allowing each to bid on the price of the offering online, with all paying the same price. It differs from the traditional pricing method that is established by the company and its underwriters.
But the traditional IPO typically is priced below where the actual demand is so that there is a pop once the offering begins trading. The IPO often is viewed as a "gift" for institutional investors who do business with the investment banks throughout the year and want to maintain that relationship. In addition, there is an inherent risk in investing in a company that is just going public and is far from reaching its potential.
"It's difficult to make the transition from private to a public company, so you need to incentivize investors to come to the table," said Tom Taulli, founder of DealProfiles.com, an online service that tracks IPOs and mergers and acquisitions. "Often, the company isn't profitable, doesn't have a track record, and may have a new technology that has not been fully tested."
While an IPO is designed to reward investors, it often comes at the expense of the company, whose sole purpose in going public is to raise money for its business. Many companies end up leaving money on the table by setting a price too low in order to ensure a sizable gain once the stock begins trading.
NetSuite arguably got the most buck for its bang with the auction process. At $26 a share, the San Mateo, Calif.-based company raised $161.2 million, selling 6.2 million shares, though underwriters have an option to purchase another 565,000 shares of common stock at the $26 price. Had it been priced at $16, however, the company would have raised less than $100 million.
Paul Bard, vice president with Renaissance Capital LLC's IPOHome.com, said that from management's point of view, "it was a hugely successful offering" but did not leave much short-term upside for investors.
"The obvious takeaway is that when it comes to a hot offering such as NetSuite, and the bankers adhere strictly to the auction-based pricing mechanism, you get a situation where the first-day gain is much more muted," Bard said in an e-mail. "If the NetSuite offering was left up to the bankers and priced under the traditional method, I doubt they would have priced it as high as they did."
In its regulatory filings, NetSuite said the auction process aligns with its corporate culture and business mission.
"In the same way that our software application suite allows companies of all sizes to benefit from capabilities previously only available to large organizations, we are conducting this offering through an auction process to open participation in our initial public offering to all investors, both individual and institutional," NetSuite's prospectus said.
NetSuite was only the third company to use the open auction process this year. By far, the most celebrated IPO to use the auction format was Mountain View, Calif.-based Google Inc.'s offering back in 2004.
Steve West, David Hermer and Bill Brady of Credit Suisse Group served as lead underwriters for the offering. Michael Zigman, Bill Hambrecht and James Donohue of WR Hambrecht served as co-lead. E*Trade Securities LLC and JMP Securities LLC served as co-underwriters. Jeffrey Saper, Richard Kline and Damien Weiss of Wilson Sonsini Goodrich & Rosati PC represented NetSuite in the IPO. William Hinman, Caniel Webb, Nidhi Shah and John Delfino of Simpson Thacher & Bartlett LLP represented the underwriters.
