The IPO Buzz: It’s Your Nickel

NetSuite (NYSE: N proposed) is a San Mateo, California-based provider of online business software programs, controlled by Oracle CEO Larry Ellison. Its software is used for accounting and payroll, customer relationship management, enterprise resource planning, e-commerce and Web site development. NetSuite’s target customers are small to medium-sized businesses.
Wall Street history buffs will notice that NetSuite’s proposed ticker symbol on the Big Board is N, which once belonged to International Nickel. That may, or may not, be a coincidence. With a Dutch auction, you bid your nickel -– and you take your chances. In NetSuite’s case, some people expect the deal to perform well. Some are lukewarm and others are blunt: “Forget it.” (More on that below.)
Behind the hype, there are some interesting numbers. NetSuite’s revenues are soaring. It reported revenues of $67.2 million for the year ended Dec. 31, 2006 –- or more than 20 times its revenue for the year ended Dec. 31, 2002, when it took in $3.1 million.
For the nine months ended Sept. 30, 2007, NetSuite reported revenues of $76.8 million.
Nevertheless, red ink still appears on its profit-and-loss statement, but it is receding a bit. NetSuite reported a net loss for the third quarter of 2007 of $2.1 million, down from a net loss of $9.8 million for Q3 2006.
NetSuite expects to price 6.2 million shares at $13 to $16 per share on Wednesday evening. It’s expected to start trading on Thursday morning on the New York Stock Exchange.
Virtual Comparison
What has caught peoples’ attention is a comparison to VMware (VMW), a Palo Alto, California-based provider of virtualization software.
VMware priced its IPO of 33 million shares at $29 each on Aug. 13. That was above its initial filing range of $23 to $25 per share. It opened the next day at $52 per share. Since then, VMware sold as high as $125.25 and closed on Friday, Dec. 14, at $95.70, UP 230 percent from its initial offering price.
But the underwriting procedures for VMware and NetSuite are different. VMware went public using the standard underwriting procedures. It was priced above range and it was oversubscribed. The aftermarket orders drove the IPO wild in the aftermarket.
NetSuite will use a Dutch auction procedure. In a Dutch auction, bankers total up the indications of interest (pre-IPO orders) and calculate the highest bid it takes to sell all the shares in the offering. It is called “the clearing price.”
In a true Dutch auction, a deal will never be oversubscribed and there will be no aftermarket orders. All of these orders become part of its clearing price. And the deal usually trades around its offering price.
The Dutch auction bidding system was introduced in the U.S. IPO market in 1999 and there have been 20 such offerings so far, according to U.S. Securities and Exchange Commission filings. The median opening-day gain for the 20 Dutch auction deals is 0.91 percent.
(Note: The Dutch auctions have been around for years. The U.S. government uses this in selling its debt issues and companies have been going public via the Dutch auction bidding system in Europe and in Asia for decades.)
Moonshot into History
But for almost every rule, there seems to be an exception. One U.S. Dutch auction was a moonshot. It was
On Dec. 8, 1999, offered 4 million shares at $18 each on a filing range of $15 to $18 per share. It opened at $47.50 and closed its opening day at 63.38, UP 252.1 percent from its initial offering price.
There was a reason.
A spokesperson for W.R. Hambrecht, the lead manager, said its clearing price was well above the $18 per share where it was priced. The person said if they were to file a new S/1-A to increase the price range, they would have had to delay the deal and the IPO calendar was loaded.
There were 13 IPOs waiting to be priced over the next two days. In the end, they raised $1.3 billion. Among that traffic was VA Lenox (up 697.5 percent its opening day), Jazztel (up 237.8 percent) and FreeMarkets (up 483.3 percent.)’s bankers felt their deal would get lost in the tidal wave of those explosive deals, if delayed. They let it out the door at $18 per share, and the IPO soared into history.
Google in All Its Glory
The largest U.S. Dutch auction was Google (Nasdaq: GOOG). On Aug. 8, 2004, Google priced 1.67 million shares at $85 each to raise $1.67 billion. That’s where things got dicey.
The IPO opened at $100.01 and closed its opening day at $100.34, UP $15.34 per share or 18 percent from its initial offering price. Dutch auctions aren’t supposed to trade that way.
The clearing price was never revealed.
How’s what we do know. The winning bids got about 75 percent of their orders filled – not 100 percent. That left orders on the table — and investors responded.
In other parts of the world, when a Dutch auction is priced below its clearing price and the winning bids get a fraction of their orders filled, they call it a “dirty” Dutch auction.
Now back to NetSuite and its potential aftermarket performance. One IPO rating service sees a $2- to $3-per-share premium, others 50 cents to $1 per share. But most IPO handicappers see the deal as a “no call.”
It’s a Dutch auction.
Nobody other than the issuer and its managers will know the clearing price, and if the deal goes out at that level or gets jiggered lower. The clue will be in the retentions of the winning bids.
Passing point of interest: The Google IPO was a “no call.”