Red Hat Shares Soar, Along With Hopefuls’ Angst

As the share price of Linux flag bearer Red Hat Inc. more than tripled on its first day of trading Wednesday, the success seemed to many observers to be the long-sought validation that the “free software” movement is emerging as a potent alternative to Microsoft Corp.’s Windows software.

But a tragedy of errors by online brokerage E-Trade Group, which underwrote the offering, left many of the thousands of programmers who created Linux feeling left out of the parade.

Red Hat’s share price rocketed to $52.06, up 272% from its $14 offering price, valuing the Research Triangle Park, N.C.-based company at $3.48 billion, an enormous sum in a Linux community made up mostly of small companies. It was the eighth-largest first-day percentage gain ever for a U.S. company.

But the offering also underscored the difficulty of reconciling the interests of a Linux company with the interests of the larger Linux community.

Red Hat set aside 800,000 shares from the 6 million offered to sell to Red Hat employees and those “that Red Hat believes have contributed to the success of the open-source software community and the growth of Red Hat.”

That gesture turned into a public relations fiasco Wednesday as programmers spent the day on a roller-coaster ride, receiving conflicting information about whether or not they would be allowed to buy shares at the offering price.

“I don’t think I can go through this again,” said Bruce Lysik, a Connecticut-based consultant who has helped locate and fix bugs on Linux software. “I think I need some Alka-Seltzer.”

Lysik and other Linux programmers received letters from Red Hat last month offering them the opportunity to buy at the offering price. They were told to open an account at E-Trade, deposit $1,000 and fill out an application.

From the beginning, the process seemed unfair to many.

“I couldn’t afford to cash in. It’s an empty gesture,” said Mark Cohen, a San Francisco programmer who has worked on network elements of the Linux software system since 1993.

Also left out in the cold were the thousands of Linux programmers who live outside the country and were not allowed to participate in the offering.

When hundreds of applications from Lysik and others were rejected by E-Trade because they did not meet Securities and Exchange Commission guidelines, which include valuations of a person’s net worth, there was an outcry on Web message boards complaining about the process and attacking Red Hat for not following through on its promise.

Scott Ananian, a graduate student in computer sciences at the Massachusetts Institute of Technology, wrote a lengthy essay in online magazine Salon.com about his experience.

“We spent hundreds of hours on Linux and then we got dissed by Wall Street,” Ananian said in a telephone interview, calling the experience a “slap in the face.”

“I was really disappointed I got skunked,” said David Mandala, senior executive for special projects at Linuxcare, a company that supports Linux users. Mandala was on a waiting list to receive Red Hat shares, but his name did not come up.

Under heavy criticism, E-Trade agreed to give applicants a second chance to include assets they may have left out in their initial applications. One programmer posted an application online with advice on how to lie in a way that would assure the application was accepted.

This time, many more applications were accepted. But when it came to distributing the stock Wednesday, chaos reigned. As the price soared, Linux programmers who had their applications “accepted” now discovered through the grapevine that they had to reapply for the shares because the offering price had been raised. They were supposed to receive e-mail to that effect, but the e-mail did not reach most of the potential investors. Many were told by E-Trade it was too late to reapply.

Shortly before noon Wednesday, E-Trade sent out an e-mail telling the programmers they would not be receiving any stock. Lysik and others called E-Trade only to discover that the e-mail was sent by mistake. But by the end of the trading day, E-Trade still could not confirm who would actually receive the shares.

“It was a good idea, but the thing blew up in their faces,” said Rob Malda, who runs a Web site focused on Linux issues.