Linux hackers miss IPO boat
Published: 19 Aug 1999 12:05 BST
Forget for a moment what you've read about techno-savvy twentysomethings making a fortune on initial public offerings.
When thousands of computer buffs received an offer for what amounted to free money -- the chance to get in on one of Wall Street's hottest IPOs this year -- some of them blew it.
Instead, they wound up fuming -- and flaming -- as the stock of Linux software vendor Red Hat soared sixfold in its first three days of trading last week, from an offering price of $14 (£8.7)a share to $85.25. For programmers who got in on the chance to buy as many 400 shares, that amounted to a paper profit of $28,500 by the close of trading Friday.
Red Hat's special offer was intended as a means of paying back programmers who have done volunteer work on Linux, the computer operating system that its supporters hope could challenge the dominance of Microsoft's Windows. It was also a way of staying in the good graces of the Linux hackers, on whose efforts Red Hat depends. Instead, hundreds of the programmers didn't -- or couldn't -- cash in. Some thought the offer had to be some sort of scam: Martin Bialasinski, a Linux programmer from Germany, posted a note online to a Linux user group asking if anyone else had gotten "this spam from Red Hat about stock options".
Others couldn't scrape together the $1,000 minimum to open an account with E*Trade Group, the online brokerage firm that helped sell the $84 million IPO led by Goldman Sachs Group. Many were rejected after filling out a questionnaire about their personal finances and stock-trading history.
Setting aside 800,000 of the initial six million shares, the underwriters last month went about contacting 3,500 programmers and others, suggested by Red Hat, who are part of the "open source" community that developed Linux. "Red Hat couldn't have grown this far without the ongoing help and support of the open-source community," Red Hat Chairman Bob Young said in a 20 July email. "Therefore, we have reserved a portion of the stock in our offering for distribution online to certain members of the open-source community. We invite you to participate."
Kirk Petersen, a 24-year-old Linux programmer in Seattle, sent E*Trade $2,000 to open an account and answered the computerised questionnaire. He was rejected. He believes it may have had something to do with marking the lowest "liquid net worth" box ($0 to $19,999) and describing his trading experience as "limited".
Warner M. Losh, 32, a software engineer in Boulder, Colo., says he couldn't get money out of his mutual funds in time to meet the deadline. Now he is kicking himself. "I thought it would go up, but not as much as it did," he says. "Now, all my friends are saying, 'You should have asked me. I would have given you the money, and we could have split the profits.' "
Sam Varshavchik, 30, a self-employed computer consultant in Greenwood Lake, N.Y., sent in enough money to E*Trade to buy several-hundred shares, but was rejected even though he reported income of more than $125,000 a year, a net worth of $60,000, a year's worth of trading experience and five years in mutual funds. Mr Varshavchik says he doesn't know why he was rejected.
Word of the rejections spread quickly among the close-knit community of Linux "kernel hackers". Soon, protests flooded hacker Web sites such as Slashdot ("News for Nerds. Stuff That Matters".) "Isn't it ridiculous to 'invite' a bunch of Linux geeks to buy Red Hat if only experienced traders are eligible? And shouldn't Red Hat have known better?" said one posting. Red Hat declines to discuss the matter.
Mr Varshavchik was so annoyed that he created a Web site called "E*Trouble", devoted entirely to the Red Hat brouhaha. Another site, called "E*Scam", was set up by a Luxembourg programmer who questioned requirements that participants in the offer reside in the US. In a biting commentary that ran on Salon.com, a Web magazine, C. Scott Ananian, 23, a graduate student at the Massachusetts Institute of Technology who was initially rejected, said volunteer programmers such as him "wrote the software that Red Hat sells. We own the company in a far more real sense than any of the moneyed lords with sufficient 'liquid net worth' to take part in the offering. They're auctioning my software off on the New York Stock Exchange to the highest bidder, and I can't take part!" He added: "Won't someone stand up for the pennyante idealists encountering The Man on his turf for the first time?"
For those who didn't get to buy shares in the IPO, there is at least some solace: In the past two days, shares of Red Hat have fallen a total of $18 to $67.25.
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