More than three dozen companies that sold shares in the hot IPO market late last year, including VA Linux and FreeMarkets, face expiring lockup periods this month that could put further pressure on the already-depressed shares.
Lockup periods prevent company insiders and others from selling shares--typically for 180 days--after an IPO. Often, the shares in a company slide sharply in the days just before and after the expiration of the lockup.
But in the case of some of the companies whose lockups expire in June, the shares may not move sharply for a dubious reason: The shares have already plunged, making it less likely that early investors will sell at the lower price.
"With a lot of these stocks trading at or below their IPO price, a lot of the fear over lockups has dissipated," said Rob Noble, associate director for UnlockDates.com.
Lockup expirations give insiders, such as company executives and board members, as well as early investors such as venture capitalists, the first opportunity to sell shares. When the markets were roaring, investors had grown increasingly keen on noting such dates and watching for a dip in price as insiders cashed in.
Although the impact of expiring lockups is less severe in a down market, analysts note that investors should remain wary of the potential impact. For example, many venture capitalists received their shares for far less than the IPO price and can still capture huge profits despite a recent decline.
"We see plenty of evidence of selling off the highs," said Bob Gabele, editor of Insiders' Chronicle. "Restricted shareholders don't pay the IPO price, so their cost basis is much lower. They're likely to be less sensitive to the IPO price."
VCs also are more likely to sell for another reason: They are less concerned with how a large sale will be interpreted by other investors.
Analysts note that large sales could put greater pressure on an already volatile market, considering the sizable number of lockup shares that became available for sale last month. May, for example, marked the busiest month this year for lockup expirations, given the high number of IPOs and capital raised last November.
Among the companies with lockup periods that expire this month is FreeMarkets, a business-to-business auction site that caught investors attention with a 475 percent first-day gain when it went public last year. FreeMarkets, however, is now one of the many companies trading below or near its IPO price.
Gabele noted that ratios of 5-to-1 or higher can put greater pressure on stock prices because it substantially increases a stock's float.
Meanwhile, VA Linux--which posted the largest first-day gain ever for an IPO with a 697 percent jump--will have nearly 23 million shares available for sale on June 7. That represents a 5-to-1 ratio, based on the 4.4 million shares offered in the IPO.
VA Linux has fallen significantly since its debut. The stock, which priced at $30 a share, has fallen from its first day gain of $239.25 to about $39 today.
Analysts note that most companies experience a decline in their stock price two weeks before the lockups expire. Laura Field, a professor at Penn State University, said stocks fall an average of 2 percent per week leading up to the expiration date and the day after.
Field, along with professor Gordon Hanka, issued a report on lockups titled "The Expiration of IPO Share Lock-Ups." The report was based on data collected between 1988 through 1997 and was updated last year.
But in many cases, stocks can post much sharper movements in the days surrounding a lockup expiration.
Last month, a number of companies posted double-digit declines in their share price over a two-week period leading to their lockup expiration.
Agilent, for example, dropped 11 percent to $88.50 on the day its lockup expired, compared with the two weeks prior. The company had 380 million shares available for sale as of May 16, representing a 5-to-1 ratio.
McAfee.com also posted a 14 percent decline to $24.25 on the day its lockups expired. McAfee, which saw its shares triple on its first day of trading, had 38 million shares available for sale on May 30, or roughly a 6-to-1 ratio.
And high-flyer Vitria fell 16 percent to $31 on May 11, the day its lockup expirations kicked in, potentially putting 31 million shares available for sale, a 5-to-1 ratio. Vitria, an e-commerce software provider, has since seen its shares rebound to about $41.