January 11, 2008
NetSuite's Dutch Auction IPO
Posted by Christine Hurt

NetSuite Inc., a business software company owned primarily by Oracle's Larry Ellison, went public on December 20, 2007 using the W.R. Hambrecht OpenIpo platform.  Besides being merely another datapoint in a very small group of completed U.S. IPO auctions, the NetSuite offering raises some interesting questions.

The offering was initially publicized with an expected price frange of $13 to $16.  On December 19, after having the registration statement declared effective and accepting bids for over a week, the offering was priced at $26.  On the first day of trading, NetSuite shares closed at $35.50.  What do these numbers tell us, if anything, about IPO auctions?  One could tell a story that market demand for the offering was $26 and that the auction format allowed the company to capture the full market demand.  However, the offering price then rose to $35.50, suggesting that $26 was not the full market demand after all.  Perhaps from the bids received on December 19, $26 did represent the full market demand, but demand rose on December 20 as the market responded positively to the higher-than-expected offering price.  The share price rose due to this herd effect and will eventually fall due to arbitrage.  (The current price is $29.62)  Let's call this story Alternative #1.

If one is cynical about auction IPOs, then one could construct a different story.  Perhaps the market demand was always higher than $26 -- somewhere between $26 and $35.50.  The folks running the auction IPO underpriced this offering just like underwriters in bookbuilding offerings.  This story has some support in the fact that the offering was overallotted and that NetSuite allowed its underwriters to purchase more shares to sell after the IPO closed.  Let's call this story Alternative #2.  However, the next question would be whether the auction underpriced the issue more or less than a bookbuilding offering would have.  Would a bookbuilding offering have resulted in an offering price closer to the $13 - $16 range, pocketing more of the underpricing for those receiving IPO shares and not the company?  Or would the bookbuilding offering price have been between $26 and $35.50?

An ancillary question, and one that I raise in my article Initial Public Offerings and the Failed Promise of Disintermediation is whether a bookbuilding offering would have raised market demand to higher than either $26 (under Alternate #1) or $26 + X (under Alternate #2) through the underwriter's marketing and reputational value.  In the NetSuite offering, the lead underwriter was CreditSuisse, so it may be that this offering had both the pros of a Hambrecht IPO and an offering led by a Wall Street underwriter.

In addition, this offering raises questions I haven't considered, but on which I would love more data.  First, Ellison sold about 10% of his own holding, but retained a majority of the shares.  Remember that in the Google offering, founders Sergey Brin and Larry Page also sold a small percentage of their shares.  Does the presence of a shareholder with a large stake who is selling shares in the offering create an incentive to go the Dutch Auction route?  Or would the retention of a large stake create an incentive to go the bookbuilding route and hope for a price "pop" that lasts long enough to sell inside shares?  Does the shareholder's stated intentions for programmed sales change this incentive.  (Also remember that both Brin and Page sold off large amounts of Google stock beginning shortly after the IPO.)  Does the savviness (is that a word?) of the founders affect the offering decision?  Ellison is obviously a seasoned player in the technology world.  Ellison, Brin and Page are currently the #4 and #5 (tie) wealthiest Americans.  Is it a coincidence that each chose an auction IPO?

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