Hot IPOs leave an aftertaste

Last week's rat-a-tat of blockbuster IPOs gave easy pickings to business writers. They let loose with a stream of the usual superlatives to peg the shenanigans of VA Linux Systems and online auctioneer FreeMarkets, the first stocks ever to close above $US200 on opening day. But the morning after showed a Net IPO game in which investors and companies alike are vulnerable.

The whole Linux thing unnerved Barron's Online's Bill Alpert. "Linux software has captured Wall Street's imagination and is holding it hostage," he pronounced, aghast at the movement of VA Linux shares from a $30 opening price to a $239 close - a nearly $10 billion valuation for the itty-bitty business. Sure, it makes sense that the more software that Red Hat gives away, the more consulting business it will do, he conceded. But at $273 apiece, Red Hat shares trade for 1100 times the annual sales implied by the company's latest quarterly performance. Alpert's conclusion: The products are wonderful values, but right now, the stocks aren't.

Linux may seem an oddball proposition for Wall Street, but it's "no daffier than anything else in the dot-com world," said Money.com columnist David Futrelle. "Plus, Linux has the advantage of being backed by vast hordes of energetic programmers willing to improve it for free."

Much has been made of the idea of free software selling for big bucks, and Futrelle chimed in with his take. "The hardest thing for many hackers to accept, evidently, is that the markets don't work the way computers do. Markets aren't even remotely logical; they don't compute. Complete idiots can and often do score bigger in the markets than those with brains as big as Linus Torvalds."

Meanwhile, TheStreet.com's Adam Lashinsky reported that Linuxite Andover.Net's decision to stage a Dutch auction IPO cost the company plenty of dough. We've heard a version of this complaint before, when reporters mocked the dull debut of Salon's stock. In their defense, Dutch auction fans always point out that their model is not supposed to deliver a big first-day pop. They charge that investment banks set IPO prices based on what their institutional clients are willing to pay, and that the fat cats set an artificially low price betting that, when opening-day trading goes ballistic, they'll snag a juicy profit. Dutch auctions, by contrast, seek to price shares near their market value, thereby giving companies the benefit of a more realistic valuation. Problem was, it didn't work, said Lashinsky.

W Hambrecht's auction left Andover.Net plenty undervalued, Lashinsky charged. Shares in the group of Linux-based Web sites debuted at $18, closed at $63, and ended day two of trading at $77.50. Lashinsky tallied the damage - or the amount of additional money Andover.Net could have raised in the 4 million-share offering - at $238 million. What happened?

Lashinsky suspects that the little-guy investors profited from the same low-ball game that they watched the big guns of investing dominate for so long. According to Lashinsky, when it comes to playing IPOs, investors have finally got game: "[I]t turns out that individual investors - who accounted for about half the shares purchased - are just as good at sandbagging an investment bank as institutional ones are."

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