StorageNetworks Soars in IPO

Updated from 1:29 p.m. EDT

The stock market debut of StorageNetworks ( STOR) hearkened back to initial public offering days of old, as its shares more than tripled Friday.

Priced at $27, StorageNetworks' stock shot up as high as 102 and closed up 63 1/4, or 234%, to 90 1/4. The offering price was raised from the $23-to-$25 range, which in turn had been increased from an initial range of $17 to $19 a share because of strong investor demand. The offering of nine million shares raised $243 million.

The company, based in Waltham, Mass., runs a fiber-optic network that is used by its clients -- including Yahoo! ( YHOO), Merrill Lynch & Co. ( MER) and AristaSoft -- to store and access data.

"There are many factors driving the company's successful offering, including the small size," said George Nichols, a research analyst at Morningstar.com. "Only 10% of its shares are public."

In addition, StorageNetworks is the runaway leader in a market -- storage -- that will grow from 5% of information technology budgets in 1998 to 17% in 2003, according to Forrester Research.

Even so, "anyone holding shares in the company may want to take some profits now, and anyone watching on the sidelines should stay there," Nichols cautioned.

His main concern: "I don't think the valuation is sustainable." StorageNetwork's opening price of 96 3/8 a share valued the company at $8.5 billion -- an astounding 460 times annualized sales. "At that price, don't be surprised by a free fall once the initial trading frenzy dies down," he said.

Other warning flags are an increasingly hostile relationship with EMC ( EMC), the No. 1 maker of storage-server hardware, with EMC threatening legal action for alleged misrepresentation of the relationship between the two companies. After all, EMC customers generated nearly 30% of StorageNetwork's sales in the last quarter.

Nichols noted that there has also been heavy selling by the company's two founders, Peter Bell and Bill Miller. Earlier in the year, they sold nearly 30% of their holdings at less than a 10th of Friday's opening price, though they still own 12.8% of StorageNetworks.

Goldman Sachs was the lead underwriter for StorageNetworks.

The IPO with the next biggest pop was Exfo Electro-Optical Engineering ( EXFO), which closed up 69%. The $182 million issue of 7 million shares was priced at $26 each, well above the $23-to-$25 range.

The shares closed up 17 7/8 to 43 7/8, after going as high as 56.

Taking advantage of investor enthusiasm for optical networking plays, both the number of shares issued and the pricing range were increased. Exfo's underwriters increased the offering size from 6 million shares and the price range from an initial $20 to $22.

The Quebec-based company makes equipment that is used by telecommunications carriers to test and monitor fiber-optic networks. Its customers include AT&T ( T), Bell Atlantic ( BEL), ECI Telecom ( ECIL), Marconi ( MCONY) of Britain, Nortel Networks ( NT) of Canada and Qwest Communications International ( Q).

Merrill Lynch led the issue, with RBC Dominion and Wit SoundView as the co-managers.

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