Strong Hands Push VA Linux to Record Heights

There wasn't much flipping in today's record IPO. Institutions bought and held, waiting to see if the stock will go even higher.
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Kathleen Smith was in the middle of explaining how her fund doesn't get drawn into flipping IPO stocks for a quick buck when the IPO of

VA Linux Systems

(LNUX:Nasdaq) went across the tape at 299 per share.

Smith, co-manager of

Renaissance Capital

's

(IPOSX)

IPO Aftermarket Fund, was stunned as VA Linux began trading Thursday afternoon at almost 900% higher than Smith paid for the stock the night before.

"This is incredible," she says. "There is obviously a tremendous supply/demand imbalance."

That imbalance seemed to have been created by a base of institutional shareholders unwilling to part with many shares. This kept the stock price high, those already in the stock happy, and a large contingent of smaller investors watching the party from the winter street. This time around, flippers need not apply.

Wednesday's IPO for Linux-linked

Andover.Net

(ANDN)

, which popped 252% yesterday, seemed to stoke the fires for VA Linux today. If Andover.Net's second day is any indication -- up another 22% to 77 1/2 -- the smaller guys will eventually get their turn at this pricey party.

Smith, for one, still isn't sure how long the fund will hold its piece of VA Linux. "I don't know what we'll do," she says.

VA Linux sold 4.4 million shares in an IPO at 30 per share Wednesday night after lifting the pricing range twice from an original range of between 11 and 13. However, within minutes of its first trade at around 12:45 p.m. EST Thursday, double-digit share prices were just a memory for this company. After it hit a high of 320, the stock eased back and settled in a trading range of between 255 and 265 for much of the remainder of the trading day.

The stock closed its historic debut at 239 1/4, up 209 1/4, or 698%, from its original pricing, but down 25% from where it peaked earlier in the day. The 698% first-day run eclipses the previous 606% record set by

theglobe.com

(TGLO)

a year ago.

About 70% of the stock went to institutions and 30% to retail investors on the night of the pricing, but once it started trading today, it was retail buyers that fueled the demand, even if they couldn't get their hands on many shares.

Even before the stock started trading this morning, a thread on

Silicon Investor

devoted to the company shot up to No. 1 on the site's "hot subject" list. "Good Luck to us all!!" wrote "the Chief."

Although volume in the stock was 7.7 million shares, that was relatively low compared with some highfliers, such as

Red Hat

(RHAT)

, which saw 18 million shares trade its first day. "There were very few flippers. A lot of people held," says one banker close to the Linux deal, indicating the belief in additional upside. In fact, it was the dearth of sellers willing to part with the stock that helped drive the price to such incredible heights, the banker says.

As a result, many investors were left out in the cold and sought refuge on the message boards. "eightsdad," a Silicon Investor member, had no luck. "Placed an order for 300 shares LNUX. For 'volatile' stocks, broker insists on limit order, so I entered $40. IPO price plus 33%, right? Strange feeling getting shut out cuz I guessed low by factor of 7."

A trader who goes by "KZAP" called a couple of brokers, online brokers and a friend in California. "There's just not enough to go around!" KZAP wrote.

Although the "no flippers/everyone's holding" boilerplate is what everyone close to the deal is supposed to say, in the case of VA Linux, it may actually be true. "All of our funds are holding it," says Diane Startari, IPO specialist for

Federated Investors

. "I didn't execute a sell all day after placing the stock." After the stock settled into a trading range between 255 and 265 around 2 p.m. EST, many of the institutional players indicated that they were willing to wait and see where this stock goes over the next few days, Startari explains.

"They think there is room to grow," she says. But her clients weren't buying any more shares to add to their positions, indicating some nervousness about the prices at these levels.

That too-scared-to-move mentality was echoed in how the bid/ask spreads came in so quickly on the stock. As the stock fluctuated around 260, the spreads on the bid/ask were as low at 1/16 to as high as 1/2 -- both remarkably low for a stock of this volatility, says Michael Schwartz, chief options strategist for

Oppenheimer

.

Schwartz took a pause from watching options activity to glance at the buzz around VA Linux. "The numbers are going so quickly

indicating rapid trading that they are just a blur on my machine," he says.

Meanwhile, developers of the Linux software, many of whom were offered shares at the offer price through the directed share program, banded together on

slashdot.org

, a site for developers of open source software. One developer, who requested not to be identified, bought 140 shares at the offer price. "It'll pay for a nice vacation," he said.

Jonathan Corbet, a Linux developer and editor of the

Linux Weekly News

, got 100 shares at the offer price and tried to get some more through

E*Trade

(EGRP)

. "I put in a limit order for 100 shares at 60 but I don't think I'm going to get them."