Rackspace IPO tanks

August 8, 2008: 5:13 PM ET
Investors hoped a high-flying debut from Rackspace would reignite the IPO market. No such luck.

Rackspace took the IPO plunge Friday and fell flat on its face, which will only make other startups more hesitant to follow its lead.

The web-hosting company had planned to offer 15 million shares at between $12 and $16 per share in a modified Dutch auction, but hopes ran even higher. Scott Sweet of IPO Boutique told TheStreet.com that Wall Street chatter indicated Rackspace (RAX) share would price as high as $17; MorningNotes pegged it at closer to $16. The shares ended up pricing Thursday night at $12.50, and they began trading closer to $10 per share. They rose as high as $11.58 in mid-day trading before settling back near $10.

"If people were looking for this deal to turn things around for the market, it certainly hasn't done that yet," Renaissance Capital analyst Matt Therian told Marketwatch, managing to sound both gloomy and hopeful.

Trying an initial public offering this year was a gutsy move to begin with. Only four U.S. tech companies (including Rackspace) have tried making their public market debuts in this rocky economic environment, according to Dealogic – and there were actually zero venture-backed IPOs this spring, making it the driest quarter since 1978.

Rackspace, though, had a few things going for it. The company had net revenues of $362 million in 2007, profit of $17.8 million, and steady growth rate, making it the rare tech startup with a track record showing profit growth and financial discipline. But apparently that wasn't enough to overcome a choppy market and general skepticism about the hosting market in which it operates. (As I noted earlier this week, the hosting market is a crowded field, and there are some unflattering parallels to the real estate market.)

So what's a tech IPO watcher to do? Maybe look overseas. According to Dealogic, that's where a lot of the action is this year. Though the values aren't nearly as high as the U.S. market, South Korea has done 18 IPOs this year, and Poland has done 12. The Dealogic numbers, below:

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