11:21AM Salesforce.com 14.96 -1.14: The lock ups of Salesforce.com (CRM) and Google (GOOG) have attracted a fair amount of attention, so we figured that now would be a good time to discuss what a lock up is and why they are used.
Lock ups are basically restrictions that companies put on the trading of shares of stock to limit the amount of selling shortly after they go public. Generally, shares that were bought early on, typically by venture capital style investors are the one that are locked up. The shares are not delivered to the client until a specific date, usually a few months after going public. This ensures that the initial amount of selling is limited to those that were in the initial public offering or a limited amount of early investment shares.
The lock up has a few effects; it keeps the early investors involved in the company and its progress even after the IPO, and it also serves to limit the amount of initial selling. Lock ups have a few bad effects as well. They provide a window of opportunity for some investors to ride the stock while the float, or the shares available to the public, is thin, and then sell as the shares come to market.
Selling as the shares hit the market is a common practice, and one that is being exhibited in shares of Salesforce.com. The expiration of the lock up brings many additional shares to market. Not all of those shares will be sold, but the mere idea of all those shares that are now available sends many investors to the exit. The common thought is that if the early stage investors are getting out, and they have known the company for a good deal longer than most, then perhaps I should get out as well.
Another lock up of note is the ladder style that Google is using. They have a number of shares coming to market, but they are releasing them from lock up on a step-by-step basis. The next lock up is set for the middle of January, but a bigger one lurks in February. More than 175 million shares of Google come to market, and after the run up the stock has seen, it would be hard to imagine investors not taking a profit once they are allowed to do so.
There are several studies that point to the performance of a stock after the lock up expires, and it is safe to say that most come to the same conclusion: After the float is expanded, and supply increases, the shares have a tendency to underperform the market. This is not always the case, but is a good rule of thumb to follow.
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The above from Briefing.com |
