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Red Hat IPO Brings Fortune, Frustration for Many

By Frank Dabek

The initial public offering of Red Hat Inc. stock brought quick profits along with frustration for the handful of MIT affiliates who were offered the chance to purchase initial shares in the Linux distribution company.

Red Hat’s stock, which opened on August 11th, jumped as high as $90 a share before a steady decline brought it into the middle sixties last week. The IPO shares were offered at $14. That possible $76 dollar gain translates into a paper profit of more than $30,000 on 400 shares. The stock has since recovered to a close near $75 yesterday.

C. Scott Cananian, a LCS graduate student, whose frustrations with the IPO distribution process led him to write a series of articles in the on-line journal Salon <>, was eventually able to purchase 400 shares at the IPO price.

Cananian was initially told by E*TRADE that he was not qualified for the offer. E*TRADE required that all potential applicants submit a profile describing their net worth and trading experience. Many open source developers submitted profiles which failed E*TRADE’s eligibility requirements.

“I talked with E*TRADE to try to convince them to change” the eligibility profile, he said. Rather than falsifying his profile, Cananian wanted to “participate for [him]self.”

As the deadline for purchasing stock neared, however, Cananian submitted a new profile “more or less the same” as his original but which “gave myself more net worth,” he said. He was accepted for 400 shares but was “very unhappy” that the re-application was necessary.

Derek A. Atkins also received 400 shares but after an almost two week delay. “I was very disappointed with the process,” Atkins said. “E*TRADE didn’t understand what they were getting into.”

Cananian also reported difficulties using E*TRADE’s automated customer response systems, including misleading “smart alerts,” automated emails designed to aid E*TRADE investors.

However, Atkins is “excited to have gotten something even though it wasn’t everything I’d asked for.”

Students plan to keep shares

Cananian and Kevin E. Fu G, who purchased 200 shares, are holding the bulk of their Red Hat stock.

Cananian is using the stock to offset student loans. “[I plan to] hold onto [the stock] as long as I can pay off Uncle Sam,” he said.

Fu “sold a few shares to make up for part of [his] investment” but expects to hold the remainder of his 200 shares.

The continually dropping value of Red Hat initially prevented Atkins from selling his stock but he eventually sold it in the high sixties for an after-tax-profit of around $10,000, he said.

The Linux hackers turned investors offered some advice for other free software companies planning to go public. Atkins said simply, “Don’t use E*TRADE.”

A “huge clash between the financial industry and open source people” is the cause of much of the confusion over the IPO, he said.

Cananian said, “it would be very nice if the next Linux company provides a way for non-Americans to participate.”

Only citizens of the United States were eligible to participate in the Red Hat IPO, due to potential problems with foreign laws governing investments. Cananian noted that many of the top Linux developers include Linus Torvalds, the creator of Linux, are not American.