NetSuite's IPO: How Sweet It Is

The offering may validate the on-demand software model—and make another $1 billion for Oracle CEO Larry Ellison

by Aaron Ricadela

Oracle Chief Executive Larry Ellison is even wealthier after strong investor interest boosted the value of his software venture NetSuite. The on-demand, accounting-software firm saw its shares surge 36% in their stock market debut Dec. 20, giving principal owner, the billionaire Ellison, a stake worth north of $1 billion and yet another lever to shape the direction of the software industry.

NetSuite sold about 6.2 million shares—about 10% of the company—in a Dutch auction-style initial public offering (BusinessWeek.com, 7/2/07) that raised $161.2 million. That gives the company a market value of more than $1.5 billion and makes Ellison's stake worth more than $1 billion. Ellison owns the majority of NetSuite shares and will continue to exert control after the IPO.

The offering could also further boost the recovering IPO market, even as investors begin their holiday vacations and Wall Street looks to the new year for clearer signals about the stock market's direction. NetSuite, which has been flirting with an IPO for years, set a target price of $26 for its shares late on Dec. 19. Earlier that day the company had raised its price range for the second time in as many days, from $19 to $22 per share. On Dec. 5, the company had set an initial range of $13 to $16 per share.

Shares of NetSuite (N) rose 36% to finish at $35.50 in their debut session on the New York Stock Exchange, where CEO Zach Nelson helped clang the opening bell. The shares had been as high as $30 and as low as $23.86. Nelson said in an interview that the company had received bids from individual and institutional investors, and that the IPO's "democratic approach" to pricing could lead to large swings in the stock's price.

NetSuite makes accounting software for midsize companies, delivering it to users over the Web. Customers pay via renewable subscriptions, vs. the traditional way of selling business software, in which customers pay hefty up-front fees and regular support charges and install programs on their own servers. NetSuite's model is similar to one used by customer management software maker Salesforce.com (CRM), which continues to post solid results (BusinessWeek.com, 12/4/07). One question among analysts: Will software that works in sales departments deliver the same results for bookkeepers?

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"What everybody's waiting to see is whether this is going to fly in the ERP [enterprise resource planning] space," says Jim Shepherd, an analyst and senior vice-president, research, at tech industry consultancy AMR Research. AMR says such "on-demand" software accounts for just 1% of sales in the market for ERP applications, which companies use to track their financial performance, plan budgets, and forecast sales. The worldwide market for enterprise applications could reach $35.8 billion in 2008, according to AMR.

Yet a disproportionate number of companies say they want to license enterprise software through subscriptions. According to an AMR survey of 204 business software buyers in September, 39% said they would prefer to purchase enterprise applications through on-demand licenses. "While no one in the investment community is fully convinced about the business model—what it takes to make money and when—they're certainly intrigued by it," says Shepherd. "They see it as a new opportunity in the software space."

Strong demand for software and other information technology helped the IPO market continue to thaw in 2007. Through Dec.