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Rackspace's Painful IPO Signals Industry Worries

Rackspace Hosting (NYSE: RAX) shares fell by 12 percent in the Web hosting company's market debut Friday, a day after its initial public offering priced at the lower end of the forecast range.

The San Antonio-based company's shares traded at $10.92, down 12.6 percent, in mid-morning trading on the New York Stock Exchange. Its shares opened today at $10, or 20 percent below the price set for the IPO.

Rackspace's IPO priced for $12.50 per share, at the lower end of the estimated range of $12 to $16 a share.

The news points to further signs of weakness in the Web hosting business, said Renaissance Capital analyst Matt Therian.

"There are continued worries about IT spending, especially for Rackspace that relies on small and medium sized companies," he said.

Rackspace had filed for an IPO in 2000, only to withdraw it when the market cooled to tech-related IPOs that year.

The most recent IPO from an IT company was ArcSight (NASDAQ: ARST), a provider of security and compliance management software, in February. Its shares fell 2 percent in first day trading, according to Thomson Reuters data.

So far in 2008, 12 tech IPOs have been pulled.

In yesterday's IPO, Rackspace, which competes with Equinix (NASDAQ: EQIX), Switch and Data Facilities (NASDAQ: SDXC) and Internap (NASDAQ: INAP), sold 15 million shares and raised $187.5 million. The company said it plans to use the proceeds of the IPO to finance its growth plans, which may include paying off debts or acquisitions, according to a regulatory filing.

Rackspace's IPO underwriters were led by Goldman Sachs & Co, Credit Suisse, and Merrill Lynch, which have the option to purchase an additional 1.9 million shares from the company, and 345,000 from existing stockholders.