Some very interesting Lockup situations.. "
The Lowdown on Lockups
By Emily Burg
Correspondent
04/07/2000 1:10 PM
This story has been changed from an earlier
version, which mischaracterized the distribution of
Agilent Technologies' shares as the end of a lockup
period.
Dot-coms are having a rough week, but watch
what happens when the floodgates open and
shares from companies that went public during the
tech IPO frenzy last fall pour into the market.
Dozens of last fall's highflying new issues, like
Martha Stewart Omnimedia (MSO: NYSE) and
Akamai (AKAM: Nasdaq) all have lockups that
expire this month and next.
One thing that this week's market volatility has
made clear is that tolerance for unprofitable
Internet companies is waning -- and quickly. Part
of the problem is that the market is over-supplied
with dot-com shares right now. There are simply
many more richly valued Internet stocks than
investors willing to shell out for them. And as the
market churns, more and more shares in recently
public companies are already being sold-off.
Normal Part of Business
The lockup period is the 180 days after a
company's IPO during which the SEC prohibits
company insiders from selling their shares. The
regulation is meant to protect investors from
instability that mass selling could create in a stock
just brought to market.
IPO lockups expire every month as a normal part of
the market cycle. But the market's already bracing
itself for the largest IPO ever -- the $10
billion-plus IPO of AT&T's (T: NYSE) wireless unit
-- while fighting to steady itself against volatility.
"Lockup expirations are a big problem," says Jeff
Hirschkorn, senior market analyst for IPO.com, a
Web site that specializes in covering initial public
offerings. "There's a big oversupply of Internet
stocks on the market already, and it's only going
to get worse."
Institutions Trying on Shorts
Not everyone sells out when their lockup period
expires, but many do. And with the market
tumbling for many new companies, insiders will
probably take some profits. Keep in mind that
insiders often obtain shares at far less than even
the IPO pricing, so they could collect a hefty profit
whether the share price is at astronomical levels or
below issue price.
History shows that the price of a stock whose
lockup period has just expired often comes under
selling pressure and that pressure is growing. First
Call/Thomson Financial's Director of Insider
Research, Bob Gabele, says that in February, there
were $22 billion in restricted stock sales. That's a
phenomenal rise from the $1 billion to $3 billion
typically sold monthly from 1995 to 1998.
Institutional investors have gotten used to seeing
these stocks sink. So they're often out in the
market shorting the stocks ahead of their lockup
expiration.
Bradley Alford, the founder of IPO Lockup.com, a
site that tracks lockup expirations, agrees that in
recent months the trend has become more severe.
"Some have taken to calling my site Short.com,"
says Alford.
VCs Cash In
Venture capital firms are often among the first to
sell their shares when the lockup expires. "VCs
aren't worried about holding on to show good
faith," explains Gabele.
That could spell trouble for stocks like Akamai,
which trades at an astounding 2,700 times 1999
revenues -- and that's after plunging nearly 50%
in recent weeks. Akamai's lockup ends on April 25,
when a potential 82.4 million shares could enter
the market -- and three VC's hold 21 million of
those shares.
Based on Akamai's average daily trading volume, it
would take the market 116 days to absorb
unlocked Akamai shares, according to IPO
Lockup.com.
Akamai is just one example. This month, about 50
lockups expire, ranging from disappointments like
E-Stamp (ESTM: Nasdaq), which trades for less
than 67% below its IPO price, to winners like
Aether Systems (AETH: Nasdaq), which is up
about 860%.
"If I were an investor right now, I'd take a chunk
[of my money] off the table," says IPO
Lockup.com's Alford. "Investors are realizing that
the stocks just aren't going up."
Tales of Terra
There is much more in store for May, when large
lockups for companies like Terra Networks (TRRA:
Nasdaq)unwind. IPO Lockup.com points out that
Terra's 253 million shares, which will be freed on
May 12, would take almost two years to be
digested based on its current average daily trading
volume.
And it's not just dot-com IPOs with small floats
that are unlocking. Shares in several of last fall's
largest IPOs -- several of which got a boost from
their tech association -- will be entering the
market. The lockup on the largest-ever US IPO
from UPS (UPS: NYSE) expires in May.
Meanwhile, an incredible 84% of Agilent
Technologies (A: NYSE) shares will be freed via a
shareholder distribution related to its separation
from Hewlett-Packard (HWP: NYSE). While this
does not constitute the opening of a lockup, it
does mean that 380 million more shares will be
available for resale.
Between these three stocks alone, 636 million
shares could hit the market.
A Window for the Locked-Out
Not everyone thinks that lockup expirations signal
despair for stocks. Unlocked shares can be a great
way for individual investors who were locked out of
the IPO to purchase shares on the dip.
VC firm Kleiner Perkins Caulfield owns 28% of
Martha Stewart publicly traded shares. When its
lockup expires on April 15, 41.3 million shares will
be freed, of which Kleiner Perkins holds 12 million.
But few individual investors got in on Martha
Stewart's IPO, which closed at $35 on its first day
of trading. Now they can buy into the
well-decorated American dream, at the reasonable
price of $16 per share.
"[Unlocks] can be positive in the long term for
stocks in high demand with liquidity issues," says
Kevin Marcus, Managing Director for the Carson
Group. |
