Riches to Rags

It’s a striking image indelibly etched in Net investors’ minds. Stephan
Paternot and Todd Krizelman parading in front of the Nasdaq market site
wearing T-shirts and blue jeans, sporting Cheshire grins that could only
belong to two twenty-something co-founders who just conquered an opening
day record with their smash hit (TGLO).

From $9 bucks to $90 in just under sixty seconds, the wunderkinds set off a
brushfire of would-be cyber-entrepreneurs who scrambled to follow suit. My,
how times have changed. What goes up must come down, and once investors
were saddled with a savage case of vertigo, the company’s stock price was
thrown overboard faster than an unwelcome stowaway.

Both pioneers have since been put out to pasture in favor of more seasoned
management, but there won’t be any happy ending for this riches to rags
story. Just an important lesson learned. Getting to the top isn’t the hard
part. It’s staying there. And sometimes being numero uno can be more of a
burden than a blessing. Which conveniently leads me to the latest water
cooler chat about another high-wire act.

Sunnyvale-based VA Linux Systems (LNUX)
wrestled the IPO record from just over a year later. The
open-source irrational exuberance produced a 700% moonshot that had Alan
Greenspan pitching a fit. Linus Torvalds walked on water, and Internet boom
times had never tasted so good.

Fresh off its celebrated 52-week high of $320 per share, VA Linux looked to
share the wealth. The company unveiled plans to snatch up (ANDN)
, a techie Web site that underwent a massive Linux makeover en route to its
own wildly successful IPO. In a Linux fever pitch, the newly repackaged
Andover smelled sweeter than sweet, and VA Linux was in the mood to stop
and smell the roses, to the tune of one billion bananas.

I used Andover myself long before the site hit most investors’ radar
screens, and I was floored by the bloated price tag. It’s a great resource,
but somehow I couldn’t shake the feeling that VA Linux got hoodwinked by
the hoopla. After all, fair’s fair. But, this one looked like highway robbery.

Well, in a curious turn of events Wednesday, VA Linux announced plans to
amend the terms of its deal with Andover. In addition to the lucrative
stock swap, the original courtship called for $60 million in cold hard cash
to be hand-delivered to the blushing bride-to-be. But, faster than a New
York minute, all the leaves have fallen off the money tree; and in this
latest market downturn, it’s time for VA Linux to circle the wagons.

The company lopped off the cash payment, and not one to look a gift horse
in the mouth, Andover graciously accepted. Just two short months later, the
modified deal is valued at roughly $300 million. The share prices of both
companies have been put through the spin cycle, both tumbling 85% off their
52-week highs.

The good news is that Linux players are finding a bottom, and there’s
probably never been a better time to buy the leaders. Big fish will
continue to gobble up the guppies, and the open source OS has a future so
bright, it’s got to wear shades. Pundits are already penning Linux’ last
chapter, but I’m betting its best days are ahead. Just a bit more grounded
in cyber-reality.

Any questions or comments, love letters or hate mail? As always, feel free
to forward them to [email protected].

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