FreeMarkets flies in opening day

The Pittsburgh-based company rose 210 to 258 as 5 million shares changed hands in early afternoon trading. The shares opened at 248, giving the company a market value of $8.42 billion. FreeMarkets sold 3.6 million shares at 48 each yesterday, raising $172.8 million for the 11 percent stake.

FreeMarkets is benefiting from the expectation for growth in its business--arranging auctions so companies can buy and sell anything from rock salt to circuit boards--as much as from the demand for initial share sales by Internet companies.

"It's a business-to-business play that is hot," said Lawrence York, manager of the www.Internet Fund in Lexington, Ky.

Shares of VA Linux Systems, a maker of a software operating system, surged eightfold yesterday in its first day of trading. That gave VA Linux the best first-day gain of any U.S. IPO this decade. According to CommScan, 279 Internet IPOs this year have gained on average 90 percent in their first day of trading.

Investors are betting more companies will tap FreeMarkets because its auction system can help cut costs. The company estimates it has saved clients--including 30 companies and governments--as much as 25 percent on purchases.

Such auctions may grow more than 20-fold next year from $3 billion this year, according to A.T. Kearney, a management consulting firm based in Chicago that became a competitor of FreeMarkets after setting up its own auction service.

FreeMarkets generates revenue when clients such as General Motors and United Technologies pay fixed fees to be a part of its auction system. The company receives additional revenue when companies sell or buy its merchandise at more favorable prices than initially expected.

FreeMarkets posted revenue in the nine months ended Sept. 30 of $13 million, up from $4.8 million in the same period a year earlier. Still, the company has yet to make money. During the same period it lost $13.5 million, up from $89,000 a year earlier.

FreeMarkets says more than 2,000 suppliers from more than 30 countries have participated in its auctions. Still, more than half the sales during the first nine months of this year came from two clients: automaker GM and United Technologies, which owns the Pratt & Whitney aircraft engine manufacturer and helicopter maker Sikorsky.

Glen Meakem, FreeMarkets' chief executive, holds 10.4 percent of the shares following the sale, which gave the company a market capitalization of $1.63 billion.

FreeMarkets' board of directors includes L. John Doerr a general partner of Kleiner Perkins Caufield & Byers, a Silicon Valley venture capital firm. He joined in October.

Such backing has helped the firm on Wall Street and encouraged investors. Bear Stearns analyst Scott Ehrens issued a "buy" recommendation for the stock before it began trading. Ehrens predicted FreeMarkets could hit $300 a share within 12 months, and $540 within three years.

The Wall Street firms that managed the sale--Goldman Sachs and Morgan Stanley Dean Witter--were bullish enough to bump up the price at which the shares were sold to $48 from an initial target of about $16.

Even so, investors bid for 80 times the amount offered, or $13.8 billion worth of stock, according to a person familiar with the transaction.

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