A $53-Million IPO for VA Linux Could Cap the Season, but Can It Top Red Hat?
A projected $53-million initial public offering from VA Linux Systems Inc., a Sunnyvale, Calif.-based servicer of Linux operating systems, is expected to be one of the hottest IPOs of December, perhaps of the year.
But it remains to be seen whether the VA Linux offering, scheduled to be priced this week, will replicate the blockbuster success of the IPO from competitor Red Hat Inc.
Durham, N.C.-based Red Hat went public at $14 on Aug. 11 and closed Friday at $201 on Nasdaq, a 1,336% gain.
Both companies specialize in supporting users of Linux, the free operating system that some argue will one day threaten Microsoft Corp.’s Windows. It’s already popular among serious techies--the type who like taking their computers apart--and among fast-growing Internet businesses.
VA Linux, which builds systems to commercial customer specifications and provides support services, has plenty going for it: revenue that has more than tripled over the last three quarters, customers such as IBM and EToys and early investors such as the prestigious venture capital firm Sequoia Capital and chip giant Intel Corp.
“This is going to be a smoker,” said David Menlow, head of IPO Financial Network, a data tracker in New Jersey. “There is currently a short supply of Linux IPOs. This has to be the stock that has the biggest promise going into the end of the year for California.”
Other analysts, however, say VA Linux is no Red Hat. They are skeptical of the rush of fledgling “me-too” companies joining the Linux IPO bandwagon, pointing to deals expected from TurboLinux Inc. and several others next year.
“The home run has definitely been hit as far as Linux distributors go,” said Robert Whiddon, senior editor with IPO Reporter in New York. “It’ll be difficult for them to be better than Red Hat.”
Though revenue has surged, VA Linux posted a net loss of $14.5 million for the fiscal year ended July 31.
Even if it’s not as red-hot as Red Hat, Whiddon expects VA Linux to do well.
Linux companies are struggling to differentiate themselves by creating and selling proprietary applications for the system. Though most of these applications can be downloaded free, users pay Red Hat and VA Linux for technical support, consulting and other services.
VA Linux, formerly known as VA Research, expects to sell 4.4 million shares for $11 to $13 each through an underwriting team led by Credit Suisse First Boston. Other bankers on the deal include Deutsche Banc Alex. Brown, Hambrecht & Quist and Lehman Bros. The stock is expected to trade on Nasdaq under the ticker symbol LNUX.
Linux, a popular system for sending Web pages to desktop users, is often upgraded for free by a devoted community of programmers. Its share of the server operating market worldwide has grown from less than 15% in 1998 to about 31%, according to International Data Corp., a research firm.
In response to Linux’s rising popularity, Microsoft recently posted a section detailing “myths about Linux” on its Web site. Some analysts said a key recent court ruling in the government’s antitrust case against Microsoft has fueled Wall Street’s interest in anything Linux-related.
“The weaker that Microsoft appears, the stronger these companies appear,” said Robert Enderle, an analyst with Giga Information, a consulting firm in Santa Clara.
However, becoming profitable is the real challenge for Linux firms, analysts say. That’s why Linux firms are developing proprietary versions of the operating system and trying to attract users to their Web sites by offering specialized information and chat groups on Linux topics. Red Hat says it is garnering rapidly increasing revenue from its site, https://www.redhat.com.
VA Linux has bought the rights to https://www.linux.com, which could help differentiate it from other system operators trying to position their firms on the Internet.
Still, whether any of these companies can successfully expand their Internet businesses remains to be seen.
“The market is treating them like the next Microsoft, but these are service companies and should be valued as such,” Enderle said.
Regardless of how the market greets VA Linux, December is expected to be another strong month nationwide for IPOs.
Boosted by such mega-deals as the $5.5-billion IPO from United Parcel Service, November set a record for U.S. IPO volume at $16.9 billion. November was also a record month for first-day IPO performance, with the average offering gaining 102%, according to Thomson Financial Securities Data, a New Jersey firm.
Nearly 50 deals are on the nationwide calendar for pricing this month, according to Securities Data, with 12 this week alone, including several from California. By comparison, there were 23 IPOs last December and 36 during December 1997.
Despite earlier fears of a pre-Y2K shutdown, “there’s no December freeze,” said Richard Peterson, market strategist for Securities Data. “We’re trying to have a $100-billion year here.”
It’s already a record year for IPO volume. As of Dec. 1, the 501 IPOs sold in 1999 raised $65 billion, compared with 374 in 1998 that raised $37 billion.
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Times wire services were used in compiling this report.
Remember that initial public offerings are highly speculative and not suitable for all investors.
Debora Vrana covers investment banking and the securities industry for The Times. She can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
