The Avanex Lockup Solution:
Avanex insiders had a problem, they were about to lose their ability to utilize the early end of the lock up period on certain shares, due to the decline in share price below the trigger level. They needed a solution. Did they negotiate one? It cannot be determined at present. Is there a remarkable coincidence that is occurring at present to benefit the insiders at AVNX? It cannot be determined.
Is there something in the recent events we have witnessed to indicate that there is something peculiar regarding this company's change of fortune. Absolutely.
Here's what the facts are. They are indisputable.
Form 454B4, filed 02/04/0000:
sec.gov
Page 18: Regarding the eligibility of shares to be traded on May 3.
<snip>
This release will occur if the last reported sale price of our common stock is at least two times the initial public offering price per share for 20 of the 30 trading days preceding the 90th day after the date of this prospectus. Of these shares to be released on May 3, 2000, 11,315,945 will be eligible for sale, in some cases subject only to the volume, manner of sale and notice requirements of Rule 144.
<end snip>
Now let's look here:
chart.yahoo.com
The IPO price of AVNX was $36. May 3 is the 90th calendar day from the IPO date of Feb. 8. Backtracking 30 prior trading days we arrive at March 22 as the first trading day in the 30 day period within which the stock has to trade above 72 in order to qualify the insider shares for Rule 144 inclusion according to the Form 424BF filing, dated Feb. 4, 2000.
Reviewing the closing prices of AVNX from March 22 forward, we have 17 days from March 22 until April 13 where the stock closed above $72, the cut off price for eligibility for the May 3 lock up. From April 14 thru April 20, the stock was trading below the $72 trigger price. Thus, the company insiders and VC partners would have been highly motivated to do whatever they could to bring the price back up to the minimum $72, for at least 3 more days before the May 3 cutoff. . I would say that for the company insiders, the Gilder endorsement was a godsend. The question that I would pointedly ask: Was it a coincidence? Is it even faintly possible that Gilder could have been unaware of the radically disfavorable position of the retail investor in all this? With market conditions as they are today; without Gilder's intervention, there was very little likelihood, IMO, that AVNX would have been able to fulfill the requirement to maintain its price above $72 for the required 20 days in the qualifying period.
On page 70 of the same document we read that under Rule 144: ".....beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will equal approximately 625,293 shares immediately after this offering; [[Ed. this is a non-effective clause]] or
- the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale."
These four calendar weeks would be:
April 02-08 -- 2.152MM shares traded
April 09-15 -- 2.634MM shares traded
April 16-22 -- 2.517MM shares traded
April 24-26 - 11.444MM shares traded (thru Wednesday)
Summing these volume figures we arrive at a total (thru 4/26) of 18.474MM shares traded. Dividing that figure by 4, we come up with a figure of 4.686MM shares on average per week for four weeks. And we still have two days left in the week. (I will forgo the pro forma trades of Thursday and Friday as they are academic to the discussion at hand.)
Conclusion - Gilder Effect has increased the "average weekly trading volume", in the first three days of trading in week four, from the prior 2.434MM shares (average of the first three weeks) to a new average of 4.686MM shares, only counting the first three days of the Gilder effect of 11.444MM shares in the first three trading days of week 4.
The increase in share volume is (4.686MM - 2.4343MM = 2.252MM shares. This is the increase in the number of shares that insiders will be able to sell into the public markets after May 3, thanks to the Gilder effect. But only if the shares traded above $72 for 20 of 30 days remember. So the prudent man may conclude that without the Gilder effect, the lockup due to end on May 3 would have been a nullity. Instead, due to the Gilder Effect, the conditions to end the lock up will almost certainly have been met. We have but one day to go to create the compliance with the stipulations of the 454B4.
Finally, before we move on to the hypothetical discussion, we need to make note that this company has a flotation of 6MM share, it has 62MM shares outstanding. The public ownership of 6MM shares is about to see an inundation of no less than 4.686MM shares and more likely well over 5MM shares. Can the public absorb this level of dilution without massive price declines?
So, let's now move to the hypothetical realm. Assuming that the conditions are met to allow lock up shares to be sold on the public market, what will the results be for the parties involved. First, for the insiders, it will be a windfall. Conservatively, let's say they sell 4.686MM shares at an average price of $60. This will put $281MM into their pockets. But wait, you say, isn't the price of the stock $113? Yes, today it is, but once the number of shares in the flotation is increase by 80%, can we safely conclude that the current price will hold? Is the retail investor being well served by the Gilder Technology Report? I will let you draw your own conclusions.
Bon Chance, Le Faineant |
