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Cashing out is secondary nature

A wave of secondary offerings is being driven by initial investors who are now ready to cash out.

In the wake of the flood of initial public offerings for tech companies over the last two years, secondary offerings are reaching record levels, in part driven by early investors looking to cash out of their investment.

"In the first quarter, there were $3.4 billion in tech secondary offerings," said Richard Peterson, an IPO analyst with Securities Data. "That was the best ever for first-quarter tech secondaries."

This past first quarter ranked among the four best quarters for high-tech secondary offerings ever. The second quarter of 1995, raising $4.4 billion, holds the top spot.

Check Point Software (CHKPF), a leading firewall vendor, is one example of that trend. It recently announced plans to float 5.5 million shares in a secondary offering; 4.7 million of those belong to initial investors--the investors who got the company off the ground in the first place.

Most secondary offerings are driven by companies' need to raise additional funds to cover expansion and other costs.

But this wave of secondary offerings is also partly a simple coincidence: the lockup agreements that commit those investors to keeping their shares are starting to expire at a lot of companies that went public in the past year. Check Point's shareholder sell-off, for example, arrived shortly after its 180-day lockup period ended. The company went public in June.

IPO lockups can expire as early as six months after the IPO launch, said David Menlow, editor of IPO Financial Network. Venture capitalists often hold large stakes in individual companies; if they sold their shares in a piecemeal fashion, it could potentially put pressure on stocks over drawn-out periods, said Bruce Lupatkin, research director for Hambrecht & Quist. So, instead the companies prefer to roll out secondary offerings that sell off all of the VC shares at one time.

Unloading stocks in an more orderly fashion creates less volatility on the market, Lupatkin explained.

William Elmore, general partner with Menlo Park, California-based venture firm Foundation Capital, said the stock market has been fairly receptive to placing and selling large chunks of stock, making secondary offerings even more attractive.

"It's a convenient time for a company to go get more money for expansion and its shareholders to [cash out]," he said.