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Lockup periods loom over high-flying IPOs

As a result of the turmoil that has rattled tech shares in recent weeks, investors are watching carefully for signs of insider selling as some key lockup periods expire.

As a result of the turmoil that has rattled tech shares in recent weeks, investors are watching carefully for signs of insider selling as some key lockup periods expire.

The tech-heavy Nasdaq composite index has fallen sharply since mid-March, deflating several high-flying initial public offerings. When the lockups expire for these young companies, some investors fear that insiders, early investors and employees will run for the exits to capture dwindling profits.

Lockup periods prevent this group from selling shares for several months after an IPO. And given the market's recent performance, some investors and analysts are concerned that a flood of selling could further swamp some already foundering shares.

Lockups typically apply to a broad cross-section of investors who get in on the ground floor of a public stock offering: company founders, employees, venture capitalists, other early investors, and friends and family.

"When the markets get shaky, (company) insiders usually hold back on selling shares because of scrutiny they'll receive (for selling) in a down market," said Bob Gabele, editor of Insiders' Chronicle. "But venture capitalists, early investors, and friends and family have less political and peer pressure."

He added that this latter group also usually accounts for most of the shares held in lockup, compared with the amount held by company executives and board members.

"These investors are more likely to sell in a bear market, because their cost basis for the shares is so low," Gabele said.

There is evidence to support Gabele's view. Craig Columbus, president of ScoreLab, said insider sales in all industries fell to $6.1 billion in March from $9.7 billion in February.

"Most companies that have come off their lockups in March had insiders who refrained from selling stock at depressed prices," Columbus said. "That's a positive sign for investors that executives were unwilling to sell at fire-sale prices."

Akamai Technologies is one such company.

Shares in the company, which helps speed the delivery of Web pages, debuted at $26 in late October and rapidly jumped to $345.50. But since its January high, the stock has fallen 78 percent, closing at $73.06 yesterday.

A lockup period was set to expire today. But yesterday, the company announced that it received agreements from company insiders and venture capitalists to postpone the expiration until July.

CNET TV: Lockup roundtable
CNET TV: Lockup roundtable


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The company sold 8 million shares to the public, but a whopping 70.3 million shares could flood the market at the expiration of the lockup. That gives the company a nearly 10-to-1 ratio in terms of the number of shares that can reach the public market compared with what is currently trading. Such a high ratio should concern investors, Gabele said.

The bulk of the shares under lockup, 57 million, are held by executives and venture capitalists. The group agreed to postpone the lockup date until after the company releases its quarterly results in June.

"This group is very bullish on the company and wants to convey the message that they believe in the company and stand by it," said Caryn Converse, an Akamai spokeswoman.

Among other companies to watch, the lockup period for Chartered Semiconductor Manufacturing expires today. Shares in the Singapore-based company jumped from an IPO price of $20 to as high as $113 in late March. But since then, the company's shares have fallen 30 percent to close at $77.59 yesterday.

The company floated 22.5 million shares in its offering and will have 97.9 million shares available for sale today, said Jeff Hirschkorn, senior analyst with IPO.com. That gives the company a fairly low 4-to-1 ratio.