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Investors anxiously watch lockup periods

Shares of some high-tech companies are being affected by more than the Nasdaq's recent decline: Insiders are selling some of their lucrative holdings for the first time.

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Investors can add another item to the long list of factors that make tech stocks even more volatile: expiring lockup periods.

The end of a lockup period often puts additional pressure on share prices because some company insiders and early investors are allowed to sell large blocks of shares.

Shares of Epiphany and Kana Communications, for example, soared after their Look out for lockups initial public offerings last September. But the shares stalled and began to drop sharply in the days preceding yesterday's expiration of the lockup periods.

Investors have long viewed expiring lockups as a potential risk. But as tech companies chalk up huge gains following their IPOs, lockup periods have become increasingly important because insiders are more likely to turn enormous paper profits into cash.

While important, it's difficult to conclude that an expiring lockup will necessarily cause a company's shares to decline. Several factors can influence the impact, including: how far a stock has climbed since the IPO, the number of shares that can be sold, the relationship of the shareholders to the company and whether the expiration is staggered over a period of time.

Companies that post sizable gains after their IPOs face the greatest likelihood that employees, executives, directors and early investors will want to cash out a portion of their holdings, said Paul Elliott, an analyst with First Call/Thomson Financial.

Another important factor in measuring the impact of an expiring lockup is the number of shares that can be sold in relation to the number of shares currently trading in the market, he added. The higher the ratio of shares to be released compared with the overall float can put more pressure on the stock.

Epiphany, for example, had a relatively small ratio. The company had 1.6 million shares become available for sale, compared with the 8.9 million shares in the market.

But come April, the company will have about 20 million shares available for sale once the lockup from its secondary offering expires.

Epiphany spokesman Todd Friedman noted that half of the 20 million shares are held by company executives and directors--a group that is not likely to dump a large portion of their holdings.

"Investors need to look at how many shares are held by insiders," Friedman said.

Ian Morton, an analyst with Chase H&Q who follows Epiphany, said stocks usually face pressure in the weeks before a lockup expiration and then rebound in the subsequent two or three weeks.

Epiphany priced its IPO at $16 a share last September. The stock soared to more than $307 last month, but in the past two weeks it has lost about 45 percent of its value. The shares are currently trading around $175.

Morton noted that other issues affecting the price include the company's recent announcement that it will acquire Octane Software for more than $3 billion in stock.

Keynote Systems, an e-commerce consultant and Web site performance measurement company, along with Foundry Networks, which provides routers and switches to Internet companies, are also among the highfliers that face lockup expirations this month.

When the lockup expires, Foundry will have a ratio of about nine shares held by insiders, directors and others to every share currently on the market. As a benchmark, most tech companies have ratios of between 5-to-1 and 8-to-1, Elliott said.

Foundry will have 88.3 million split-adjusted shares available for sale March 26 when its lockup expires. The company floated 10 million split-adjusted shares at $12.50 in its IPO.

The shares surpassed $200 several weeks ago but have since lost about 25 percent of their value. They fell $12.06, or about 7 percent, to end the day at $157.19 yesterday.

Foundry executives were not available for comment.

Window of opportunity
Although lockup expirations allow insiders to sell shares, there are other restrictions that can prevent their immediate sale, noted Jenniffer Siemaszko, investor relations manager for Keynote.

Insiders are often prohibited from selling shares, except during designated "windows" determined by the company. In addition, if the shares are in the form of options, they can't be touched until they are vested, Siemaszko said.

Keynote, for example, has 3 million shares that will be available for sale tomorrow. But 1.95 million of those shares cannot trade until the options vest and the trading window is open, she noted.

In May, however, the company will have 17 million shares available for sale once the lockup from its secondary offering expires. That will give Keynote nearly a 2-to-1 ratio.

Kana Communications faces a similar staggered release of restricted shares. The company has about 19 million shares adjusted for a 2-for-1 split available for sale. That's roughly a 3-to-1 ratio, considering the company issued 6.6 million split-adjusted shares in its IPO.

But nearly 30 million shares are still awaiting the expiration of the lockup period. Those shares are tied up until the company closes its acquisition of Silknet Software, which is expected in the second quarter. At that point, the company will have a ratio of about 7-to-1.

The company is in a so-called quiet period pending its Silknet acquisition and could not comment.

Some companies intentionally stagger their lockup dates, First Call's Elliott said.

"It's a relatively new development that's emerged in the last year to year-and-a-half," he said. "It softens the blow of the lockup expirations...There is a lot of misperception and fear around lockups, and this is a way of managing it."

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