IPO Spotlight: NetSuite

An unconventional auction process has injected some uncertainty into NetSuite's hotly anticipated initial public offering scheduled for this week.

The on-demand business-management software maker has elected to use a "Dutch auction" process to price its IPO. Investors bid by submitting the number of shares they would like to buy and the price they are willing to pay.

The auction determines the clearance price, which is the highest price at which all the shares in the offering can be sold.

The goal of an auction is to set the IPO price closer to the shares' actual market value than the typical IPO process, which usually prices the offering at a discount _ with the hope of a pop during the first day of trading.

"The formula has the potential to price the stock at a higher premium to virtually take most of the aftermarket room in the stock out of the equation" said David Menlow, the president of IPO Financial Network.

However, NetSuite may ultimately set the IPO price below the clearance price - in part to prevent the stock from dropping after the IPO.

While the usual process favors investors, who make money off a first-day stock spike, an auction funnels more of that money to the company.

David Menlow said the "biggest concern" surrounding NetSuite's IPO is "whether or not the Dutch auction system is the best platform for this type of offering."

Google Inc.'s IPO in 2004 is the most high-profile example of this type of auction, and it was far from an unqualified success.

Google's IPO was criticized for a number of missteps, which culminated in an 11th-hour decision to slash the IPO price to $85 and reduce the number of shares offered, based on a perceived lack of demand. The company had originally expected the IPO to price between $108 and $135 per share.

The stock then opened at $100 and closed slightly higher, representing an 18 percent gain over the IPO price.

Google quickly recovered from its early stumbles, and the stock has since multiplied to its current price of $689.96. But the verdict on the auction process is less certain. "It's not a very tried-and-true process," said Sam Snyder, an analyst at IPO research firm Renaissance Capital.

As a result, analysts are not sure what to expect when NetSuite goes public next week. NetSuite currently expects its IPO of 6.2 million shares to price between $13 and $16 each.

Much of buzz surrounding the IPO stems from Oracle Corp. Chief Executive Larry Ellison's investment in the company. "He carries a huge amount of muscle in the market," Menlow said.

Ellison and his family will either directly or indirectly own 66 percent of NetSuite's common stock after the IPO, although Ellison has relinquished most control over how his shares will be voted.

Snyder also noted NetSuite's potential for growth. He said that the company has accelerated revenue growth over the past couple of years while maintaining a relatively static sales force. During the first nine months of 2007, NetSuite increased its sales to $76.8 million, from $47 million in the prior-year period.

Menlow said, however, that the company continues to report hefty losses. For the nine months ended Sept. 30, NetSuite narrowed its loss to $20.6 million, from $27.6 million.

Brian Hamilton, chief executive of financial research firm Sageworks Inc., also expects NetSuite, which gears its software toward mid-sized businesses, to face stiff competition in that market from small-business leader Intuit Inc.

Ultimately, the stock's performance will depend on the market's perception of the final IPO price, Menlow said. "It's all going to be a question of how well this deal's going to be received."

NetSuite plans to list its shares on the New York Stock Exchange under the symbol "N."