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Insiders at newly public companies sell as shares decline

There's been some interesting insider selling at a few companies that make networking equipment and software: Akamai Technologies, VA Linux Systems and Chordiant Software.

    Combing through the most recent batch of SEC filings, I came across some interesting insider selling in August at several companies that make Internet networking equipment and software: Akamai Technologies, VA Linux Systems and Chordiant Software.

    What makes these transactions stand out is that all three companies went public within the last year, and the recent insider activity represents their first post-initial public offering (IPO) consensus disposals. In fact, these were the first-ever open-market insider sales at two of the three firms.

    The three companies have more in common than just the recent consensus selling. Their stock prices have performed very similarly during their relatively short trading histories. All three stocks reached all-time highs shortly after going public, but these gains eroded before the insiders were allowed to sell shares. Investment banks generally restrict or "lock up" insiders from disposing of shares immediately following IPOs. Although the duration of the lockup can vary, it is most commonly 180 days or six months.

    In these three examples, executive selling occurred in August as the shares were 80 percent to 90 percent below their all-time high levels. The prices of all three stocks have continued to decline following the sales.

    Akamai Technologies provides primarily U.S. and European companies with its FreeFlow high-bandwidth Internet content delivery service, which uses a global network of 4,000 computer servers to direct Web traffic as efficiently as possible. On Oct. 29, 1999, Akamai went public at an offering price of $26. By January, Akamai shares traded at an all-time high of $345.50.

    However, in mid-April, just prior to the company's April 26 IPO lockup expiration, the stock reached a low of $56.63. At that time, company insiders chose not to sell Akamai at its discounted price level. But three months later, between Aug. 1 to Aug. 21, seven Akamai insiders sold a combined 1.1 million shares at prices ranging from $62.58 to $78.75. Chief scientist Thomas Leighton and chief technology officer Daniel Lewin reduced their holdings by 434,987 and 440,837 shares, respectively, while president Paul Sagan and vice president Jonathan Seelig each made a 100,000-share distribution. At the time of these recent trades, Akamai shares were down nearly 80 percent from their January high. The stock has subsequently declined further, closing yesterday at $46.88.

    VA Linux Systems is the leading maker of computer networks and workstations that use Microsoft Windows' rival Linux as its operating software. VA Linux shares began trading publicly Dec. 9, 1999, initially opening at the $30 level. On their first day of trading, the shares soared to $320. However, by April the stock had fallen to a low of $26.50. The trading lockup expired on June 6, and later that month, only one insider, senior vice president Robert Russo, sold 106,548 shares at prices in the $31 to $45 range--as much as 90 percent lower than the stock's December high.

    The first consensus selling at VA Linux occurred between Aug. 28 and Aug. 31, when five executives distributed a total of 321,534 shares at prices between $40.38 and $53.14. Executive Bruce Twickler and vice president Daniel Shore sold a respective 100,000 and 75,000 shares. Russo further reduced his holdings by 53,534 shares. Shares closed yesterday at $48.25.

    Chordiant Software makes a suite of software products that allow businesses to integrate and personalize customer information and relationships across various channels, namely the Internet, email and telephone. Chordiant went public Feb. 15, 2000, at an offering price of $18. Similar to VA Linux, Chordiant shares skyrocketed on their first day of trading (to $54.06) before subsequently giving back all of the gain (the stock declined to a low of $5.25 in early May). On Aug. 12, the lockup on the trading of Chordiant stock expired.

    In this case, the company's lead underwriter, Robertson Stephens, chose to employ a 90-day lockup restriction period. Between Aug. 14 to Aug. 31, three Chordiant insiders took advantage of the lifting of the restriction and sold for the first time, despite the fact that the stock was trading down as much as 80 percent from its February high. Chief technology officer Carol Realini sold 255,500 shares, while chief executive Samuel Spadafora and chief financial officer Steven Springsteek disposed of 60,000 and 25,000 shares, respectively. The stock yesterday closed at $7.69, down from the $9.34 to $13.48 range in which the insiders sold.

    Analyzing insider selling is often a difficult task. There are many reasons why someone might sell shares, including liquidity and diversification as well as valuation concerns. In many cases, technology insiders and many investors choose to recognize profits as their stock soars to new highs. Therefore, I'm obviously more alarmed when I witness insider selling when stocks are trading at low price levels.

    However, this situation is less of a concern in instances of selling following an IPO, such as the three companies profiled above. In many cases, the insiders involved in the trading have a substantial portion of their wealth tied to their company stock, and even if they are bullish about their company's prospects, they may want to diversify a portion of their wealth into other financial instruments. Liquidity can also be a major factor behind the selling as these insiders may have access to capital (their stock) for the first time.