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NetSuite IPO Prices at $26 Per Share

by Steve BogdonThursday, December 20, 2007

SAN FRANCISCO (AP) - NetSuite Inc. (N) priced its initial public offering at $26 per share Wednesday, raising $161 million for its online business software service and showering its largest stockholder, billionaire Larry Ellison, with still more riches.

The IPO proved more lucrative than the San Mateo-based company anticipated, reflecting the hopes riding on NetSuite despite a nine-year history of losses, which total nearly $242 million.

NetSuite's investment bankers, led by Credit Suisse and WR Hambrecht, aimed to sell 6.2 million shares at $13 to $16 apiece when bidding began last week in an unusual "Dutch" auction that gave more investors a chance to participate in the IPO. The bankers still have an option to buy another 930,000 shares at the IPO price from NetSuite and its top executives.

Propelled by the strong demand for its stock, NetSuite now boasts a market value of $1.5 billion.

nvestors' interest in NetSuite will be tested again Thursday when its shares are to debut on the New York Stock Exchange under the ticker symbol, "N."

NetSuite is at the forefront of a gradual change in the way companies - especially small- and mid-sized businesses - buy software to help manage and analyze their operations.

Instead of paying a hefty price to install programs on their own computers and maintain them, thousands of companies are subscribing to services like NetSuite's that enable workers to use software on any device with an Internet connection.

The on-demand concept, known as "software as a service," or "cloud computing," is winning over converts because it saves money and boosts employee productivity by freeing programs from specific computers. Software also can be updated more quickly when it is hosted online.

"This is where all the interesting ideas in software are coming from today," said Deborah Farrington, a NetSuite director and general partner with StarVest Partners, a venture capital firm that owns a 4.5 percent stake in the company.

Some NetSuite rivals like Intuit Inc. (INTU), whose QuickBooks program is widely used by small businesses, still believe most companies won't entrust control of critical technology to an online vendor.

"No one wants to risk being out of business if their Internet connection goes down," said Angus Thomson, general manager of Intuit's mid-market group.

Ellison, Chief Executive of business software maker Oracle Corp. (ORCL), was one of the first industry leaders to bet on on-demand computing.

Having bankrolled NetSuite in its early days, Ellison owns a 54.5 percent stake now worth $844 million. Those holdings supplement the estimated $26 billion fortune that Ellison has amassed during the past 30 years while building Oracle into one of the world's most successful software makers.

Ellison's reputation as a software visionary added to NetSuite's credibility and fueled the demand for the IPO shares, said Sam Snyder, a senior research analyst for Renaissance Capital, a Greenwich, Conn. research firm.

To avoid potential conflicts of interest at Oracle, Ellison put his NetSuite holdings into a limited liability corporation that is supposed to preclude him from controlling the company's board of directors. Ellison intends to use his stake to fund charitable contributions, according to papers filed with the Securities and Exchange Commission.

Ellison's two adult children, David and Margaret Ellison, together own 11.6 percent of NetSuite, a stake that's worth $179 million and is kept for them in separate trusts.

Other big winners in the IPO include two former Oracle employees, Evan Goldberg and Zachary Nelson.

Goldberg, NetSuite's chairman and chief technology officer, owns a 7.4 percent stake worth $117 million and Nelson, NetSuite's CEO, owns a 3.4 percent stake worth $54 million.

The IPO also will enrich NetSuite's 600 employees, most of whom have stock options in the company.

NetSuite will use $8 million raised in the IPO to repay loans made by Ellison through his investment vehicle, Tako Ventures, which took its name from the Japanese word for octopus. NetSuite has earmarked another $10 million to $15 million to open a second data center for its computers and fund other expansion plans.

The success of a NetSuite rival, Salesforce.com Inc. (CRM), helped whet investors' appetite for NetSuite's IPO. Since Salesforce.com went public 3 1/2 years ago, the company's shares have climbed more than fivefold, closing Wednesday at $59.95.

Salesforce.com is run by another Ellison protege, Marc Benioff.

But San Francisco-based Salesforce.com was already making money by the time of its IPO. That's not the case with NetSuite, which has lost money since its 1998 inception. The losses have been narrowing, totaling $20.6 million through the first nine months of this year compared with a $27.6 million setback at the same juncture in 2006.

NetSuite's robust growth, coupled with the bullish outlook for online software services, apparently carried more weight with investors. NetSuite's revenue through the first nine months of this year totaled $76.8 million, a 63 percent increase from the same time last year.

NetSuite currently has 5,400 customers, mostly businesses with fewer than 1,000 employees.

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