Rackspace Readies for the Big Time

SAN FRANCISCO -- Analysts expect a relatively warm response to an IPO by Rackspace Hosting(RAX Quote), but the company faces tough competition in its attempt to produce long-term growth.

Some 15 million shares in the Web-hosting company, which had revenue of $362 million last year, are expected to price late Thursday between $12 and $16 in a modified Dutch auction, in which the underwriters may modify the offer price after all the bids are tallied. The offering is expected to raise $210 million.

After a drought in which no venture-capital backed offerings came to market during the second quarter of 2008, according to analyst Scott Sweet of IPO Boutique, Rackspace is testing investors' tolerance for new issues. Sweet says chatter indicates that the shares will price at the high end, and possibly at $17, despite the disappointing performance of most recent IPOs.

GT Solar(SOLR Quote), one of the few recent tech IPOs, came to market at $16.50 on July 24 and ended its first trading day down 12% at $14.59, according to IPO analysis firm MorningNotes. It was trading recently at $11.83.

MorningNotes expects Rackspace will price at or just below $16. The firm suspended its B rating on the issue "until we can get a clearer picture," MorningNotes stated in a research note Wednesday.

Early investors in Rackspace include venture firms Sequoia Capital and Norwest Venture Partners, which are hanging onto their stakes.

Linux software developer Red Hat(RHT Quote), which invested in the company in 2007, will sell 26% of its stake of 1.9 million shares in the IPO.