It's Internet trick-or-treat.
A flood of new shares will be hitting the market soon from all the Net companies that went public last spring and are fast approaching the end of their lockup periods.
Typically when companies go public, a standard part of the deal is a pledge by senior management, company executives, early investors and venture capitalists not to sell their shares for 180 days. These lockup period agreements are put in place to assure investors that insiders will not abandon the company and sell right after the IPO.
Through the end of the year, insiders at nearly 100 companies that tapped the public markets in April, May and June will be free to trade their shares.
And that could be scary. "Whenever you release more supply on the market it makes it
the stock less scarce and you see a dropoff in the price," says Randall Roth, senior analyst at
IPO Plus Aftermarket Fund.
The extra supply in some cases is staggering. Online toy seller
, which went public in May, has 11.1 million shares outstanding (part of the shares became available after its merger with
). But 109 million new shares will be freed up on Nov. 15.
Internet credit card company
will release 39.5 million shares, almost six times the 6.9 million share float -- or shares that are currently freely tradeable -- after its May IPO.
, publisher of this Web site, will see 11 million shares available for trading upon expiration of its lockup period on Nov. 8, compared to 6.3 million shares in the current float.
Typically, a month before the lockup period expires, trading activity in the stock picks up, as investors anticipate the increase in shares, analysts say. Shares of data tracker
, whose lockup period ends Nov. 3, have fallen 26% since Oct. 1. It didn't help that the company filed for a secondary offering of another three million shares on Oct. 8. That will come on top of the 13.1 million shares eligible once the lockup expires.
But the impact of extra shares does not appear to be long-lasting. "It's so temporary," says
analyst Tom Taulli. "These things are usually anticipated and they don't last very long. It's a short-term thing."
If anything, the increased number of shares may help calm down the overvalued Net sector. "The supply now is going to be catching up with the demand," says Vincent Slavin, a sales trader who tracks IPOs for
. "Eventually these things are going to start trading like stocks that have been around for 20 years."
Still, despite the increased number of shares available for trading, it's important to keep in mind that seldom do all these shares actually hit the market at once. Company chiefs and other top executives are unlikely to rush to the market since their action would send a negative signal; if they sold their stock at the first chance, their very action would diminish the value of their holdings. Bear in mind that many of the shares held by company executives are also subject to Rule 144, an
restriction on how much insiders can sell in a three-month period.
And for some in-demand companies, the extra shares may actually help boost the stock. "Some companies just fly through the lockup period with nary a hitch," says Renaissance Capital's Roth. For hot companies like network storage switch maker
, which will release 10.9 million shares on Nov. 20, the lockup may help others get in on the stock. "Managers would love to get more of their hands on
Brocade's shares," says Roth.