Expiring lockups could pressure high-flying IPOs
The recent reception for initial public offerings may have flattened, but the ripples from last year's IPO frenzy are still roiling the market.
With the steep decline in the Nasdaq composite index and a general aversion toward new issues, the number of IPOs this month is a fraction of the number from previous months. The number of companies coming off their post-IPO lockups, however, is expected to soar--further putting pressure on stocks.
Lockup periods typically last several months and prevent company insiders from unloading shares. This month, lockups will expire on more than 60 companies, including Agilent Technologies, McAfee.com and Vitria Technology. The deluge makes May the second-busiest month this year.
An expiration for a lockup is usually set for 180 days after the IPO. That gives insiders such as company executives and board members, as well as early investors such as venture capitalists and strategic investors, first opportunities to sell stock.
Agilent, the closely watched Hewlett-Packard spinoff, will have 380 million shares available for sale May 16, according to the company's prospectus filed with the Securities and Exchange Commission.
HP is the holder of those shares, and it has previously indicated that it plans to distribute them to shareholders midyear.
Agilent, a maker of test and measurement equipment, saw its shares soar 40 percent on their first day of trading. They currently trade about 200 percent above the IPO price.
The company floated 72 million shares in its IPO, about one-fifth of the 380 million shares that could be released after the lockup expires. Insider trading analysts consider ratios of 5-to-1 or more to be on the high side, likely to put pressure on a company's stock when the lockup expires.
McAfee also had a successful IPO, as its shares tripled on their first day of trading from their $12 offer price. The stock is currently trading about 145 percent above its offer price.
But McAfee, a Web site for security software maker Network Associates, has more than 38 million shares that will be available for sale May 30, representing nearly a 6-to-1 ratio based on the number of shares floated.
One of the higher-flying stocks, Vitria, will have nearly 31 million shares available for sale May 11. Although that represents a 5-to-1 ratio, it builds on an earlier lockup release of more than 10 million shares April 25. The two combined expirations represents a roughly 7-to-1 ratio.
Vitria's stock has lost about 66 percent of its value in the past six weeks, but it's still up 1,734 percent from its IPO price, said Richard Peterson, an IPO analyst with Thomson Financial/Securities Data.
The e-commerce software provider has initiated two 2-for-1 stock splits since going public.
Rob Noble, associate director for UnlockDates.com, said stocks that face the greatest pressure when the lockups expire are those that have tremendous run-ups in price and a large overhang, or ratio.
He added that his company also takes into account the number of days it will take the market to absorb the shares available for sale based on the company's average daily trading volume and number of lockup shares.
"The negative is there's an increase in the number of shares that will be in the market when the lockups expire; the positive is it increases the float, so maybe more institutional investors will be interested in the shares," Noble said.
Laura Field, a professor at Penn State University, said share prices fall an average of 2 percent in the week leading up to the expiration date and the day after, with half the drop occurring the day of the lockup expiration.
Field, along with professor Gordon Hanka, issued a report on lockups taken from data collected between 1988 and 1997. The report, "The Expiration of IPO Share Lock-Ups," was updated in 1999.
She added that volume usually increases 40 percent on average on the day the lockup expires.
The large number of lockups expiring reflects the frenzy for IPOs toward the end of last year. But the stage will look quite different a few months from now, as companies are less likely to explode onto the market, according to analysts.
Seven deals priced this week, raising $427 million. Of those deals, six priced below their initial ranges, said Jeff Hirschkorn, senior analyst for IPO.com.
"That reflects the market's mood right now," he said.
Next week, six deals are scheduled to price that could raise up to $248 million. Four of those deals were previously delayed, however.
"The only good deal will be Sequoia Software. It's a company that helps others build Internet portals," Hirschkorn said. "They use XML software, and that's an up-and-coming market."
Sequoia generated $8.4 million in revenues for the year ended Dec. 31, up from $4 million the previous year. Its net loss widened to $12.8 million from a loss of $3 million the previous year.
The company hopes to raise up to $42 million based on the high end of its $8 to $10 pricing range and the 4.2 million shares it will offer. The company previously had a range of $11 to $13 a share, however. Lehman Brothers is the lead underwriter, and the shares will trade under the ticker "SQSW."