Rackspace's 'Dutch' Route Offers Hope

In Rackspace's IPO auction, investors with at least $2,000 in an account at certain firms could collectively help set Rackspace's initial price through their bids. With $188 million in proceeds raised, Rackspace was the third-largest Dutch-auction IPO among those studied, following Google(GOOG Quote) and Interactive Brokers(IBKR Quote).

The overall performances run the gamut from goats to heroes. Two of the 18, Briazz(BRZZQ Quote) and RedEnvelope, went bankrupt. Avalon Pharmaceuticals (AVRX Quote) is down 94% since its IPO, while New River Pharma priced at $8 in 2004 and was bought last year for $64 a share.

Peet's Coffee and Tea (PEET Quote) and Morningstar (MORN Quote) have more than tripled.

Within that broad range, there are some trends. On average, the Dutch-auction IPOs averaged a gain of 2.4% on their first day of trading, and then went on to see an average of 104% since then, according to Renaissance's report. And that was after they saw their official offering prices drop in the auctions by an average of 7% from the midpoint of their initially proposed ranges.

Most famously, Google's (GOOG Quote) Dutch auction caused its offering price to fall to $85, significantly below its initial range of $108-$135. But Google rose 18% on its first day and has given faithful investors a return of 500% overall.

"Dutch Auctions typically result in smaller first day gains for investors as the auction process, coupled with strong demand for shares, soaks up much of the initial valuation upside," the Renaissance report said. "Nevertheless, investors that held onto the shares of fundamentally solid businesses that went public through Dutch Auctions and generated less-than-stellar first day pops have been rewarded with substantial returns."