Must Read-February 15, 2000
Looking Out for Lockups
By Cintra Scott
HAVE YOU NOTICED any odd trading behavior lately? In particular, have you noticed that some
of last summer's bumper crop of initial public offerings have been slipping in value on heavy trading
for no apparent reason? You can either blame hyperactive day traders or lockup expirations. But the
latter, you'll find, is much more predictable.
An IPO lockup expiration is a rite of passage in any young stock's life. The standard expiration
occurs 180 days after the IPO, by which time the new stock is supposed to have its sea ? er, market
legs. During that six-month stabilizing period, the IPO's lead underwriter restricts selling of any
pre-IPO stakes ? in other words, the stock held by venture capitalists, company management, and
other insiders. After the lockup expiration date, those pre-IPO stockholders can turn some of their
paper wealth into real three-homes-and-a-Masarati wealth, if they so desire.
That's good for them, but maybe not so good for you. When the supply of shares increases all at
once, a stock's price can slump. So it should come as no surprise that a typical expiration date sees
heavier-than-normal trading ? and a dip in stock price.
In their unpublished working paper, Laura Field and Gordon Hanka, assistant professors of finance
at Penn State University, found that stocks fell an average of 1.8% on their expiration dates.
Moreover, of the 3,200 lockup agreements they studied, Field and Hanka discovered that the drop
among companies financed by venture capital was even more pronounced.
"Venture funds sell more aggressively than other pre-IPO shareholders," the researchers wrote in
the report. And that's no surprise: VCs are constantly liquidating their previous investments to ready
capital for the proverbial Next Big Thing.
But that doesn't mean post-lockup stocks are damaged goods. "It's really just a change in dynamic,"
says Brad Alford, founder and sole proprietor of IPOLockup.com, a Web site that tracks lockup
activity. "There's a scarcity issue with most IPOs, and then that scarcity is eliminated."
An impending lockup expiration date is no reason for outsiders to dump a stock, Alford says. After
all, many large institutional investors actually jump at the chance to buy more shares once they are
freed up for sale. Alford, whose day job is managing Duke University's $400 million private equity
portfolio, is also quick to remind expiration-watchers that oversupply weighs on a stock for just a
few days. After that, the stock may present a short-term buying opportunity.
Last summer's IPO craze means bustling expiration activity now. We're returning to a subject we
wrote about six months ago, to give you a heads-up on what's expiring and what to watch out for.
Below are some of the highlights. (For a complete schedule, click here.)
This week has already brought a taste of what to expect. On Monday, selling restrictions were lifted
for insiders in Netro (NTRO), SilverStream Software (SSSW), Novamed Eyecare (NOVA),
Phone.com (PHCM), and Wink Communications (WINK). True to form, Netro dropped 14%
Tuesday on three times average trading volume. Meanwhile, Wink dropped 16% on ten-times
average volume. Yup, those lockup expirations can be blamed. The day after, we're still in what
Alford calls "the lockup zone." He says these stocks should begin to bounce back by the end of the
week.
So who'll be next to take a wild expiration ride? On Wednesday, the market may see more of iXL
Enterprises (IIXL) and Lionbridge Technologies (LIOX). IXL, which has already held a
secondary offering, will lift restrictions on 43% of its total outstanding shares. And look out,
Lionbridge holders: The company will lift restrictions on 73% of its total shares outstanding.
After a long President's Day weekend, insiders at Alteon Websystems (ATON), Clarent (CLRN),
Internet Pictures (IPIX) and ImageX.com (IMGX) may be able to take an even longer break. Both
Alteon and Clarent have already held successful secondary offerings, when lockup-restricted
stockholders cashed in some of their chips. On Tuesday, Alteon will see another 42% released, while
Clarent will see 47%. At the same time, Internet Pictures and ImageX.com will free up 76% and
79% respectively.
But before anyone panics over lockup damage, remember this: One of the most pronounced market
reactions to an expiration happened to Healtheon/WebMD (HLTH) in August. It dropped 18.5% to
$30.06 in a single day. If you bought it back then, good for you. It's more than double that now.
Here's the best possible advice we can give you on lockups: be aware of them, look for possible
buying opportunities, but leave the selling to the insiders.
And stop blaming those day traders. They've got trouble enough.
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