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VA Linux shares a piece of the IPO action

Following in the steps of Red Hat, the Linux company sends out a letter to developers inviting them to participate in the company's imminent initial public offering.

For a Linux company about to go public, the open-source programming community is a double-edged sword.

The hordes of programmers not only collectively created the Linux system, they also provide an effective channel to spread the all-important buzz about an upcoming initial public offering. But at the same time, a Linux company must worry about giving those same developers a piece of the IPO action.

VA Linux Systems, expected to go public next Friday, is an example. The firm sent a letter to about 3,000 Linux developers inviting them to participate in the company's imminent IPO, a source familiar with the plan said.

The method was pioneered by Red Hat, the first Linux company to go public, but it was tainted by the fact that some developers were unable to participate. VA Linux, while trying to avoid some of these problems, is running into others of its own.

The VA Linux IPO is the latest in a series of appearances the Unix-like operating system has made on Wall Street. Red Hat's August IPO, has spurred a phenomenon mirroring the heady days of Internet stocks, with Red Hat's stock leaping from its IPO price of 14 to its current value of 214.94.

That quick increase in value means people who are able to buy the stock at the IPO price can see major gains. Red Hat's founder Marc Ewing and its chairman Bob Young each have had their shares in Red Hat stock top $2 billion when Red Hat's stock reached 254 on Monday.

News of the VA Linux letter emerged last week at the online discussion site Slashdot. Slashdot itself is a part of the planned IPO of its parent company, Andover.Net, which also plans to go public next week.

One Slashdot writer said the offer let a person buy 100 shares of VA Linux stock at the IPO price--currently estimated to be between $11 and $13 per share.

The letter was sent to open-source developers--those who have contributed to the collective programming effort that has resulted in the Linux operating system, the Apache Web server and several other projects.

Red Hat gave many Linux developers a stake in its IPO, and VA Linux chief executive Larry Augustin said in an earlier interview that his company planned a similar approach of including those who are aren't VA employees but who have contributed to the success of Linux.

"It's a very clever way of getting people to put money in the stock," said Jeff Carr of LinuxPPC, a company that sells a version of Linux for PowerPC-based computers. "It's good capitalism. It's obviously effective."

Augustin acknowledged this pragmatism in an earlier interview: "Our business model depends heavily on the support of this Linux community...If you do things that don't do right by Linux and millions of Internet developers out there, they won't support you as a company, and then you won't be successful."

Including such a large number of people--many of them relatively young and without much investment experience--can be a tricky proposition. Red Hat's effort backfired with some who weren't able to participate, and the handling of the issue invited the scrutiny of regulatory officials. VA wants to avoid that, Augustin has said. "I think [Red Hat] had some glitches they've hit around E*Trade. We want to look at that and say, is there a way we can do that better?"

The VA offer apparently avoids the background checks that kept some out of the Red Hat IPO, though. "No background checks or investment savviness questionaires, just fill out the enclosed form," one writer said at Slashdot.

VA Linux, however, might already have stepped on some toes by picking the ticker symbol "LNUX."

"They're capitalizing off Linux," said Benjamin Cox, founder of the Linux Fund. "I would not have a problem if they had chosen 'VALN' or 'VALX' or something. But that fact that they dropped VA and present it to [Wall Street] as Linux" is what's irksome, Cox said.

A VA Linux spokesperson declined to comment on the issue.

Another problem: the large number of those who thought they deserved "The Letter" from VA Linux and didn't get one. "I am and have been an active kernel coder since 1994, with a healthy percentage of code in the kernel. I have yet to receive a letter of any type regarding these IPOs, probably because I do not plaster my name all over the code contributed," wrote one Slashdot poster.

Among its methods for selecting people for the offer was searching for the email addresses of contributors.

The Linux phenomenon on Wall Street, such as Red Hat's continuing stock price jumps, is "madness," Carr said. "I can't even begin to fathom why it happened."

And the huge surge of investment dollars that goes to publicly traded companies makes it difficult for privately owned companies such as his, he said.

"Everyone just dumps money into the market," Carr said. "I'm really frustrated by it because for legitimate businesses, it is impossible to conduct business without going public. I'm being forced to go public, basically," Carr said.

Other stocks that have benefited from the Linux phenomenon include Cobalt, a manufacturer of special-purpose servers that use Linux. Cobalt's stock price has jumped from its IPO price of 22 to its current value of 147.

Laura Conigliaro, a securities analyst at Goldman Sachs, began coverage of Cobalt this week with a "market outperform" rating. "As the premier provider of technology to enable small and medium-sized business enterprises to offer Web services, Cobalt is emerging as one of the leaders of the Internet-driven New Economy," she wrote in a report yesterday.

Other stocks that have jumped from Linux-related news include Corel, which has begun selling its own Linux software, and eSoft, which makes special-purpose servers that use Linux.