Rackspace IPO Starts Out Reeling

SAN FRANCISCO -- Rackspace Hosting(RAX) lost ground on its debut trading day Friday.

The tech IPO priced late Thursday at $12.50, but opened the session below $10 before climbing to $11.08 by the end of its first hour.

The offering of 15 million shares by the San Antonio, Texas, Web hosting company, which priced at the low end of its stated range of $12 to $16, raised $187.5 million in a modified Dutch auction.

During the past six weeks, first-day performance for new issues "has been dismal," said Ben Holmes, analyst at MorningNotes. "Deals that we thought had an audience absolutely melted down."

GT Solarone 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 MorningNotes. It was trading recently at $12.05.

Banks put a lid on chatter Thursday as to how the issue was shaping up, giving analysts' little insight into the rationale for the ultimate offer price. "We don't know if [the low price] is a sign of weakness or generosity," Holmes said before trading began Friday. "We hope it was a choice to price it at $12.50 -- a gesture to make the deal work, pricing it cheap to put some pop into it."

But the low initial trading price likely shows demand was low for the issue. The troubled economy has drastically weakened IPO demand, with new issues including some from China, performing poorly, Holmes said.