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As Internet IPO Lockups Expire, Shares May Flood the Market

A share glut could mean falling prices. But for Internet executives, selling out so soon could be bad policy.
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Just when there's hope that Internet stocks are starting to pick up comes a new obstacle: Companies that went public in the first half of the year will see the end of their lockup periods.

Lockups are the restrictions that keep insiders -- usually senior employees and executives -- from selling their shares post-IPO, usually for 180 days. Last spring, a deluge of Internet IPOs flooded the market, which means that this month and next, a deluge of lockups will expire. In September alone, about a dozen companies' lockup periods expire, followed by 16 in October, 26 in November and 28 in December, according to


, an investment banking research firm in New York.

The result: Millions of shares will be available for sale through the rest of the year. Internet companies have tended to offer thin slivers of themselves to the public markets, often creating high demand for scarce shares. A flood of new shares sold after lockups end could tip the balance in favor of supply and away from demand.

When the lockup period for

Value America


expires at the beginning of next month, 28 million shares will become available, compared with the 5.5 million that entered the market when it went public in April, according to company filings to the

Securities and Exchange Commission


Other companies with fewer shares ready to be freed may still feel the impact.


will have 5 million shares freed up by its lockup expiration. But compared with the 3.5 million in its March IPO, that could more than double the company's float.

For Internet stocks that are smarting from the summer slump, that could mean more trouble.

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index fell to 452.9 in early August from 824.2 in mid-April, partly on concern about the flood of Internet IPOs this spring. As of Thursday's close, it had recovered to 611.7 on hopes that a strong holiday season would shore up e-commerce and other Net-related stocks.

"If a company hasn't distinguished itself through strategic alliances or acquisitions, the lockup period could be a swan song," says David Menlow of the

IPO Financial Network

in Millburn, N.J. "Many investors are waiting for someone to start a new round of buying. And when that doesn't happen and more stock hits the market, then the traditional supply-and-demand equations take over and stock goes down."

The effects could be significant. For example,



stock dived 18.5% when its lockup period expired last month, and



shares fell 12.1% upon the expiration of its lockup period last week.

Some analysts say it's the month or two before the lockup where the most weakness shows. "People anticipate that the lockup will expire and there'll be selling pressure, so they'll actually start selling before the lockup expires," says

analyst Tom Taulli.

Driving Down AutoWeb
Stock Price of AWEB 7/1/99 through 9/9/99

Source: Baseline

A Slump for iVillage
Stock Price of IVIL 7/1/99 through 9/9/99

Source: Baseline


hit an all-time low of 54 7/8 during trading Thursday just on anticipation of its lockup ending.

Morgan Stanley

analyst Mary Meeker mentioned in a report that various lockups for the company are expiring as late as February. According to Meeker, 169.2 million shares will become available to trade during the next six months. closed the day down 8% at 58 5/32.

Some companies don't feel the effects at all.



lockup expired in late August, but its stock has risen 30% since the lockup came off. And for some hot tech offerings like

Juniper Networks


, the possibility of more shares on the market doesn't seem significant -- the company went public in June and has already filed for a secondary offering.

Rarely do all the shares available for sale after a lockup hit the market. For executives in an Internet start-up, it's bad policy to sell out at the first possible chance. "There's kind of peer pressure among execs to not sell a lot," Taulli says. "You don't look like a team player if the lockup expires and you dump a lot of stock."

But Net execs may throw caution to the wind if concerns about a Y2K disaster heat up as the year draws to a close. "It's reasonable to expect that a lot of these people will cash in their shares

instead of being subjected to the vagaries of the market and whatever emotional volatility that may result from Y2K," says Gail Bronson, senior analyst at

IPO Monitor