Kis, Glenn needs to get off Amzn, and you need to get off
Insider trading. It's accepted. Please get current.
>By SUZANNE MCGEE and TERZAH EWING
Staff Reporters of THE WALL STREET JOURNAL
Corporate executives are supposed to be bound for a time before they can cash in on the price run-ups in their companies' IPOs. But now, some executives have been given a key to indirectly open those lockup agreements.
The secret lies not just in a typical "follow on" sale to an initial public offering -- that is, additional sales of new stock by the company. Instead, the trendy maneuver is a hybrid stock offering dubbed a piggyback offering.
It works like this: Before the expiration of the traditional lockup period that keeps corporate executives and other insiders from selling, the company returns to the market with a new sale of stock that includes both new shares from the company and those held by the insiders.
In the past, insiders -- including venture capitalists and other founding investors -- would have had to wait at least six months to sell any of their shares after an IPO. With the piggybacks, they can unload a portion of their holdings in as little as 90 days.
--------------------------------------------------------------------------------
An IPO-Lockup Primer
What is a lockup?
It's an agreement between a company doing an IPO and its Wall Street underwriters that prohibits executives and certain other stockholders from selling their shares for a certain time.
Why are there lockups?
The concern is that insiders selling shares will hurt their company's stock price, especially if the sales come right after a big offering and surprise the market.
How long do lockups last?
Typically, after an IPO, 180 days. But recently the market has seen shorter lockups of 150 or even 90 days. And underwriters are more willing to let insiders in hot stocks out of their lockups early.*
How does one get around lockups?
There's the "piggyback" offering, a second stock offering that comes soon after an IPO, allowing insiders who otherwise would be locked up to sell some shares sooner.
*The Wall Street Journal lists expected IPO lockup expirations at the beginning of each week on the Deals & Deal Makers page. The Interactive Journal also soon will list the expirations.
--------------------------------------------------------------------------------
"People are looking at these offerings as a better way to manage the flow of new shares that will inevitably hit the marketplace in the future," says Michael T. Ott, co-head of equity capital markets at Deutsche Banc Alex. Brown.
There isn't a specific measure of piggyback activity, but indirect evidence suggests the practice is booming. So far this year, there have been 33 stock deals raising $13.78 billion that have been a mixture of both new and selling-shareholder shares, according to Thomson Financial Securities Data. That's up from just 20 such deals raising $3.18 billion for the same period last year, and only 11 deals raising $961.2 million in the comparable 1998 period.
Some of Wall Street's biggest firms, which once rigidly held new companies to lockup agreements, have eased up. Morgan Stanley Dean Witter & Co.; Chase Manhattan Corp.'s Chase H&Q (formerly Hambrecht & Quist); Credit Suisse Group's Credit Suisse First Boston; and Lehman Brothers Holdings Inc. are among the firms that have led piggyback deals so far this year.
Early releases to lockups are usually democratic. They permit nearly every insider to sell a certain percentage of his holdings. Sellers could range from a big venture-capital investor to the secretaries who get stock in an IPO.
In fact, the piggybacks are a sweet deal almost all around: quicker for companies that want to return to the public-money trough; quicker for investment bankers who get fatter fees faster; and certainly quicker for venture capitalists, angel investors (wealthy individuals providing seed money) and others seeking to cash in their on-paper gains faster than usually allowed.
Initial Public Offerings
See more in-depth information on IPOs.
Critics say Wall Street is always happy to bend over backward for insiders and big investors, and the ability to wiggle out of lockups could certainly be the latest example.
But there are no regulations against such maneuvers, and there hasn't been an outcry over the piggybacks. In a hot stock market, the practice hasn't hurt the stocks, in most cases. And even small investors understand that IPO insiders inevitably will sell a portion of their holdings; it doesn't necessarily mean the insiders are taking all the money and running.
"The overall etiquette of the IPO market has changed dramatically, and the way the market views an early end to lockups and quick follow-on offerings is just another example of this," says Scott Sipprelle, co-founder of Midtown Research, which tracks the IPO market. "Nobody really even seems to flinch."
Of course, sentiments could change if the market takes a turn for the worse.
For now, the piggybacks are seen, says Michael Moe, director of growth stock research at Merrill Lynch & Co., as "a nice, clean, efficient way to fill demand for stocks where a lockup is about to expire; an opportunity to avoid a nonorderly process where shares come out on the market in a haphazard way."
Even investors who would rather not see their holdings diluted from extra shares in the market figure that these offerings give them another chance to battle for shares in hot companies. And longer-term investors say these deals at least ensure that selling process is orderly and well-documented.
Inside Track
See lists of the biggest individual insider trades of the past week and a rundown of companies with the largest net change in insider ownership.
That was certainly the case with Clarent Corp.'s November stock offering. Clarent, which makes systems that allow for simultaneous translation of voice, faxes and data over the Internet and other communications networks, raised $340 million in the issue, of which $94.5 million went to major shareholders. The stock was priced at $85 each, and the shares have since climbed to nearly $103. Clarent's second issue took place about a month before the lockup agreement with key investors was set to expire.
"We viewed the secondary as the second stage of the IPO," says Richard J. Heaps, chief financial officer of Clarent. "We had always believed that the capital-raising process was going to be two-pronged."
Mr. Heaps himself was among the insiders selling into the deal. He says he sold 45,000 of his 135,400 shares to diversify his personal investments and that the company's underwriting team, led by Credit Suisse First Boston, didn't object to either the timing of the follow-on or its component of insiders' stock. "We have a very reasonable relationship with our investment bankers," he says.
That attitude is increasingly common. Bankers are looking at fast second offerings as a way to gradually release "locked up" shares onto the market in a way they believe is less likely to hurt the stock.
It's true that sticking to a strict lockup can cause pain. Take Healtheon/WebMD Corp.: The merged company's predecessor, Healtheon, saw its stock plunge 19% after its 180-day lockup expired last August. That brought its declines over the previous two months to 65%, as investors braced for what they expected would be a flood of sales. It was months after the lockup expired before Healtheon's shares resumed their upward climb. And investors have caught on to this: There's even a Web site (IPOlockup.com) that lists coming lockup expirations and encourages investors to look at these dates as buying or selling opportunities. (The Wall Street Journal also now runs a lockup-expiration table at the beginning of each week, and the Interactive Journal soon will run the table.)
There are other ways to deal with the 180-day lockup "overhang" of stock. Although underwriters have been reluctant to shorten the 180-day period, a handful have agreed to what are known as "staggered" releases, where blocks of stock become available for sale across a range of dates. That, it is hoped, reduces the likelihood that the market will pummel the shares ahead of any one particular lockup expiry date.
In other cases, companies have persuaded their bankers to announce an early release of the lockup. Companies that have done that include Redback Networks Inc., where Morgan Stanley announced a string of three "early releases," allowing insiders to begin selling a limited number of their shares beginning only 10 weeks after the IPO. But the most popular strategy appears to be the piggybacks.
"If you go out and tell people where the stock is going and how it's going to happen, it removes some uncertainty from the market," says Richard Kauffman, co-head of equity capital markets at Morgan Stanley. "No one wants to have an unexpected flood of new supply depress the stock, even when those stocks have had dramatic gains after the IPO." |
