Some good read on insider selling of internet stocks that IPO!
Should You Sell That Hot New Net Stock Before Its Lockup Ends?
Whether to buy or panic when IPO insiders start selling in the volatile world of Internet trading.
Adam Lashinsky
Conventional wisdom dictates that when executives and venture capitalists in a newly public company begin to unload their stock, savvy investors should step out of the way. In part, it's a simple supply-demand issue: More shares on the market should exert downward pressure on stock prices. There's also a suspicion that the action conveys some kind of "message"--in other words, that the insiders know something you don't.
So investment bankers, clever lot that they are, hit on a handy way of preventing early selling of stock, called a lockup restriction. In effect, insiders agree to be "locked up" and forgo the right to get rid of their shares without the bankers' permission until a fixed date, usually six months after the initial public offering.
But the problem with conventional wisdom is that the Net changes everything, to borrow the Silicon Valley mantra. Highflying tech stocks--whether new IPOs or not--move up and down with frightening volatility for all sorts of reasons, few of which have to do with the fundamentals of the companies behind the securities, or with insiders' dealings.
One explanation for a typical tech stock's volatility is also a reason not to worry about the lockup: The "float" of a young tech stock--the portion of total shares outstanding that is available to trade--is usually tiny (the float of eBay, the online auctioneer whose September IPO took the market by storm, for instance, is a mere 3.5 million of the 40 million shares outstanding). Demand is so high that there's little evidence of any effect from the relative trickle of new shares that occurs when lockups expire.
Quite the contrary. At leading Internet companies like Yahoo and software maker Inktomi, the steady flow of insider sales has been matched by outsider purchases and an ever-rising stock price.
"One of the basic tenets we all grow up with is, 'Boy, is that [the end of the lockup] going to be a scary date,' " says Peter Mills of Menlo Park, Calif., a partner in @Ventures, the venture arm of CMGI, best known as an early backer of Internet portal Lycos. "Now," Mills says, "[the lockup's end] is a date that sort of goes into the data pile. In this kind of market, it's pretty meaningless."
What about the fear that insiders are dumping shares because they know some secret about the company? Let's end the suspicion right here: They "know" as much as you do that their stock is overvalued. Take Margaret C. Whitman, CEO of eBay. She is keenly aware that when she acquired eBay stock before the company went public, it was valued at 20 cents per share, and that retail investors now are snapping up those shares for something north of $200. Any rational person would take some money off the table when eBay's lockup is lifted in late January (it shrewdly negotiated a rare four-month restriction). Investors will probably view this not as a sign that the run is over but as a golden opportunity to buy scarce shares.
One key to knowing whether the end of a lockup is a time to buy or to panic is understanding the likelihood that the management and founders of a young tech company will dump their holdings hurriedly when the locks open. And for that, investors need to know something about the companies themselves: whether they have solid business plans, with real products and markets and advantages over their competitors. (This means point-and-click day traders probably should avoid stocks with looming lockup expirations.) Is it a keeper or a fad? It's easy to say in hindsight that it would have been silly to ditch Amazon.com or America Online because its insiders were free to sell.
If the company passes the "keeper" test, investors trying to build positions in next-generation high-tech concerns should be ready to pounce, especially if the stock moves down. "As long as you assume insiders are rational about monetizing their holdings, the market values on all of these companies are more than big enough to absorb what's going to come onto the market," says J. Stuart Francis, who heads Lehman Brothers' technology investment-banking practice in San Francisco.
But sometimes you may really want to get out. A case in point is Echelon, whose lockup expired in late January. The Palo Alto maker of building-controls software went public last July 28 at $7, then plunged to $2 two months later when it missed analysts' revenue forecasts. The company has been recast--perhaps dubiously--as an Internet play, and the stock shot up to $15 as Net-stock frenzy took hold, before falling again early this year. Meanwhile, Echelon's pre-IPO stockholders--including some of Silicon Valley's most famous investors--soon will be free to dump more than 26 million shares, or 82% of the total.
It's not always easy to tell whether insiders are selling everything they can. Even after lockup restrictions are lifted, securities laws limit what insiders can sell in any one quarter, based on a formula involving trading volume. If you want to play this game at home, keep an eye on software vendor Beyond.com (which went public in late June) and its founder and chairman, William S. McKiernan. As of late January, he could sell fully five of the nine million shares he owns during the first three months of 1999. Will he?
No one knows where outrageously valued, often unprofitable, and always young tech companies' stocks are headed--not even their top executives. So when insiders cash out a piece of their largesse, all it tells investors for sure is that tech execs are human beings. Rich human beings.
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