Lock up period ends...
cbs.marketwatch.com
Can demand keep up with supply?
Lock-up expiration could test Broadcast.com, eBay
By Darren Chervitz, CBS MarketWatch
Last Update: 4:33 PM ET Jan 29, 1999
Also: NewsWatch
NEW YORK (CBS.MW) -- If share prices -- like the prices for all
goods -- are determined by simple supply and demand, then the stocks of
Broadcast.com and eBay could come under some pressure.
The reason: Employees and executives at both Internet powerhouses are
able to or will soon be able to sell their company shares for the first time.
When a company completes an IPO, only those
shares that are sold to the public become part of
the company's float, or those shares that are freely
trading. Pre-IPO investors, such as management
and venture capitalists, are forbidden from selling
their shares until the so-called lock-up period
expires, usually after 180 days.
The lock-up period for both Broadcast.com
(BCST) and eBay (EBAY), which had a shortened
120 day lock-up period, expired earlier in January,
but insiders until this week were probably still
forbidden to sell because the companies were
about to report fourth-quarter results.
(Although it varies, company policy usually forbids
insiders from selling shares a month before the end
of a quarter until two days after financial results are
released.)
Broadcast.com spokeswoman Sherry Manno declined to comment on
the company's policy on insider selling, while eBay spokeswoman Kristin
Suell confirmed that eBay insiders are now able to sell their shares.
Some observers believe the expiration of the lock-up period can cause a
stock price to fall, at least temporarily, as more shares become available
for sale.
In the case of eBay, for instance, the number of freely trading shares will
increase from about 3.5 million to as many as 28 million, not including
outstanding options that may be converted into shares, according to the
company's IPO filing. "If such holders sell in the public market, such sales
could have a material adverse effect on the market price of the company's
common stock," eBay warned in the prospectus.
(Securities and Exchange Commission regulations only allow management
and other large investors to sell a limited number of shares each month
and require that they file documents detailing such transactions.)
In a report filed as the market was opening Wednesday, Goldman Sachs
analyst Rakesh Sood mentioned the lock-up expiration as a concern.
"We expect eBay shares to perform well on the basis of its Q4 results as
well as longer-term, however, this may be somewhat offset over the next
several days as some insider shares come up for sale," Sood wrote, noting
that eBay employees were allowed to sell Thursday and management on
Friday.
Alas, eBay then went on to post an 80-plus-point gain that day. But since
then, eBay shares have given back about 26 points, including a 5.1
percent drop on Friday. Despite reporting a narrower-than-expected loss
for the fourth quarter, Broadcast.com dropped 13 to 67.
Kathleen Smith, a portfolio manager for Renaissance Capital's IPO Fund
(IPOSX), said her firm performed studies which confirmed that many new
issues show weakness as the lock-up period approaches and then
afterward. "We re-visit a stock [after] about five months and decide, 'Do
we still want to own it?'" Smith said.
Internet stocks are seen as particularly vulnerable to lock-up expirations
because many observers have attributed their incredible run-up to a
combination of small floats and high short interest.
But not all analysts are concerned about lock-ups. "It does cross people's
minds, but I think the record is spotty [as to whether it affects the stock
price]," said Ryan Jacob, portfolio manager of The Internet Fund. "A lot
of it may be psychological than actual sales by insiders."
Indeed, it appears that in many cases, weakness in stock prices occurs
prior to the lock-up expiration. For the week of Jan. 11 to 15, eBay
shares fell nearly 80 points.
A number of other recent Internet-related IPOs will soon see their
lock-up periods expire, including Cyberian Outpost (COOL), Digital
River (DRIV), Global Crossing (GLBX) and 24/7 Media (TFSM), which
all went public between late July and mid-August.
Of course, for long-term investors, focusing on a lock-up may be a bad
strategy. This reporter wrote a piece in December 1997 on At Home's
(ATHM) lock-up expiration, which freed up nearly 100 million shares
over a six-month period.
At Home's stock did go through some significant periods of weakness
throughout the year, which could have been at least partly caused by the
dramatic increase in the float, but shares are now up by 400 percent since
the story was written. See story. |
