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NetSuite Shares Surge 36 Pct in Debut

NetSuite Inc.'s shares surged more than 36 percent in their stock market debut Thursday as investors latched on to the online business software service backed by billionaire Larry Ellison.

The run-up built on the momentum of NetSuite's initial public offering, which generated such intense demand that the San Mateo-based company wound up selling 6.2 million shares for $26 per apiece -- up from the $13 to $16 target set when bidding began in an online auction last week.

When trading began Thursday, it looked like the IPO investors had buyer's remorse. The stock fell as low as $23.86 before rebounding strongly to finish at $35.50, up $9.50, or 36.5 percent.

That left NetSuite with a market value of $2.1 billion.

"This has been a surreal experience," Zachary Nelson, NetSuite's chief executive, said shortly after ringing the opening bell at the New York Stock Exchange. Nelson's 3.4 percent stake in NetSuite is now worth $73 million.

NetSuite's market debut easily outstripped the average first-day gain of 10 percent among the previous 234 IPOs priced this year, according to Greenwich, Conn.-based research firm Renaissance Capital.

More IPOs were completed than any year since 2000, when 406 companies went public amid rabid demand. In those giddy times, it wasn't unusual for stocks to double or triple on their first day of trading.

Although today's market isn't as frothy, hot technology IPOs still can deliver massive returns as soon as their stocks begin trading.

For example, the shares of business software maker VMware Inc., soared 76 percent in their debut four months ago while those of a NetSuite rival, Salesforce.com Inc., climbed 56 percent when they hit the market 3 1/2 years ago.

Unlike those two companies, NetSuite isn't profitable yet. The company has accumulated nearly $242 million in losses since its 1998 inception, although the deficits have been getting smaller in recent quarters. Through the first nine months of this year, NetSuite lost $20.6 million on revenue of $76.8 million.

NetSuite, though, boasts an asset that few other software makers have: the support of Ellison, one of the industry's biggest success stories. The co-founder and chief executive of business software maker Oracle Corp. helped start NetSuite and still owns a 54.5 percent stake in the company.

Ellison's NetSuite holdings are now worth $1.15 billion, padding his estimated $26 billion fortune before the IPO.

The Ellison connection magnified investors' interest in NetSuite, which is run by two former Oracle employees, Nelson and Evan Goldberg.

NetSuite also is a leader in selling monthly subscriptions to access business software applications distributed over Internet. Most companies still pay hefty fees to install and maintain programs on individual computers in their offices.

NetSuite reduced the odds of its stock spiking Thursday by relying on an unorthodox method to set its IPO price.

In most IPOs, the investment bankers set the price after gauging the interest among institutional investors, who then receive most of the shares. Critics say investment bankers deliberately set the IPO price artificially low to increase the odds of a big payoff for the investors who first get the shares.

NetSuite sold its IPO shares in a "Dutch" auction designed to democratize the process by allowing more individual investors to submit bids.

Google Inc. relied on the same system to price its much-ballyhooed IPO in August 2004, and its shares rose 18 percent their first day of trading. The Internet search leader's stock is now worth eight times more than the $85 set in its IPO auction.

While arguably more egalitarian, the auction also is supposed to maximize the amount of money raised by the company issuing the shares, leaving less room for the IPO investors to profit.

That goal appeared to be achieved in NetSuite's IPO, which raised nearly $70 million more than the company envisioned. "The auction was an enormous success," Nelson said.

After paying expenses and IPO fees, NetSuite expects to pocket $148.1 million from the IPO, according to documents filed Thursday with the Securities and Exchange Commission.

The company could still net another $13.8 million if its bankers exercise an option to buy an additional 565,000 shares at the IPO price. Some of NetSuite's top executives also may sell a total of 365,000 shares to the bankers.