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Lock-Up Key To Possible Fall For IPO Stocks Six months after a company goes public, suddenly more stock floods market as insiders finally can start selling their shares
Date: 9/20/99
Author: Jed Graham
The road from hyped highflier to old news is a short one for most Internet-related IPOs. How short? Oh, about six months or so.
Why's that? Lock-up.
When a company goes public, company insiders, who hold a ton of shares, typically are restricted by lock-up agreements from selling any of their stock. The lock-up usually is for 180 days.
'There's no question that the end of the lock-up period is a serious negative,' said David Menlow, president of Millburn, N.J.-based IPO Financial Network, a research firm.
Take VerticalNet Inc., which helps companies build business-to-business networks via the Internet. Its stock dropped in nine of 10 trading days in early August, right about at its six-month anniversary as a public company. It's rebounded a bit, but has yet to show the same kind of spring in its step.
The stock had been going great guns when about 7 million shares - the float - were available for trading (taking into account a 2-for-1 stock split). But as the lock-up expiration approached, investors began to focus on the 23 million added shares that would be available.
In fact, take a look today at the top 10 performing IPOs of the year. They've all come public since mid-May, so their lock-up periods haven't ended.
Before that, another group of IPOs had been the leaders. But their lock-ups ended. Their stocks, while still holding on to nice gains, buckled under the weight of more shares on the open market.
Healtheon Corp., which provides Internet transaction capabilities to the health care industry, sank more than 7 points on Aug. 10, when its lock-up expired.
Allaire Corp., which makes e-commerce software, tumbled 39% in nine straight sessions as its lock-up expired in late July.
Lock-Up Not Sole Killer
Of course, the end of lock-up isn't the sole reason IPO stocks fall. The day-trading crowd moves onto other flavors of the day. While longer- term investors focus on fundamentals.
All these factors, analysts and industry observers say, affected VerticalNet. Its stock took off from its Feb. 11 IPO price of $16 and hit a record high of 149 on April 22. The stock, which has since split 2-for-1, closed Friday at 37 1/4, 50% off its high, though still 366% above its offering price.
The company appears to be executing, though competition is growing. True, like most Net companies, it has yet to make a profit. Still, it boosted quarterly revenue 502% to $3.5 million in the latest period.
But demand just hasn't picked up the slack of more supply, analysts say.
'When a company comes public, the media are filled with stories about it,' said Paul Cook, co-manager of Birmingham, Mich.-based Munder Capital Management's NetNet Fund. 'But eventually, it falls off the radar screen.
'The glut of IPOs that we've seen over the last eight or nine months also has contributed.'
'Shorts' Eye Locks
Short-sellers - who make money when a stock falls - appear to be tuned into lock-up. In the stocks cited above, the short position rose substantially in the month ahead of expiration.
And it's not just the end of lock-up that can increase supply so much that a stock falls. Some companies make secondary offerings even before their lock-up period expires.
Two companies that did this are Priceline.com Inc., which lets consumers bid on airline tickets and hotel rooms, and Covad Communications Group, which provides high-speed Internet links over traditional phone lines. They both conducted follow-on offerings that let insiders sell shares prior to the lock-up expiration - and both stocks got hit as a result.
'We do look at lock-up periods,' said William Smith, president and portfolio manager of Greenwich, Conn.-based Renaissance Capital's IPO+ Aftermarket Fund. He said, though, that 'just because the lock-up period is up doesn't mean it's time to sell the stock.'
If top managers and large institutions aren't selling much, then the end of a lock-up period might have little impact on a stock, he says.
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