Every now and then the typical investor gets a cold lesson in the power of investing by the privileged -- the venture capitalists and insiders who buy outrageously cheap stock and don't have to worry about the public market's whims.
Such a lesson arrived quietly late last week for shareholders of
in the form of a little-noticed filing with the
Securities and Exchange Commission
. The company disclosed that the inevitable is occurring:
and insiders of four of eBay's recently acquired companies are putting themselves in a position to sell the bulk of their remaining eBay holdings. The effect -- when the venture capitalists and insiders dump their shares -- will be to boost by 16 million shares eBay's float, the portion of shares outstanding available to be traded by the public.
None of this is shocking. If you acquired shares in a company or its predecessor for a few cents or dollars and those shares are now worth 138 9/16 (eBay's close on Friday) each, you'd be nuts not to sell. Furthermore, VC firms aren't in the business of holding stock. They typically distribute shares to their limited partners, who are then free to hold or sell. In fact, the first time Benchmark distributed eBay shares in February, a minor -- and totally harmless -- selling spree ensued by a
Who's Who of Silicon Valley at split-adjusted prices in the 70s.
But it will be somewhat more telling to see what the entrepreneurs who sold their businesses to eBay for stock do with their shares. Like the VCs, they'd be crazy to hold on. But if they get rid of all their holdings, it will make a strong statement about their thoughts on the company's future. According to eBay's SEC filing, shareholders of
are registering for sale 88% of their nearly 700,000 shares, former owners of
(including four different
partnerships) may ditch 91% of their holdings, and ex-
shareholders are registering 93% of their shares. And Benchmark, which earlier this year acquired the shares of real-world auctioneer
Butterfield & Butterfield
, is registering 79% of its 17 million-plus shares.
Again, this doesn't mean the shareholders registering their shares will sell, though it doesn't take a PhD to know what's likely to occur. Still, the filing technically means only that the shareholders will be able to sell the shares down the road without regulatory hassles.
"When and if we get around to distributing them, (our limited partners) will be free and clear to sell them without filing" additional documents with the SEC, says Robert Kagle, a Benchmark partner and eBay board member. "We're going to distribute some portion of the total holdings in the fourth quarter," he adds. "But it doesn't do anybody any good to be in a hurry."
Were all the shares in question to be sold, however, that would increase eBay's current float by 46%. That increased liquidity can cut down on volatility but also tends to add near-term pressure to a stock.
One other nugget in eBay's filing demonstrates just how serious eBay is about fixing its technology problems. According to an offer letter reproduced in the filing, eBay's newly hired technology maven, ex-
executive Maynard Webb, is receiving a gargantuan compensation package. Webb will be paid an annual salary of $450,000 and a bonus of up to $300,000. He also received 500,000 options to buy eBay shares and a signing bonus of $108,000.
In comparison, eBay CEO Meg Whitman's salary in 1998 was $145,833, according to eBay's April proxy statement. Her '98 bonus was $100,000. Don't jump to the conclusion, however, that Whitman is underpaid or that Webb is overpaid. As of April, Whitman held 7.1 million shares and options. The strike price of her options is less than 7 cents. Yes,
. Webb's options were priced at eBay's stock price when he joined the company. eBay announced his appointment Aug. 9, when the stock was worth about $80.
Another Safeguard Fan
A purportedly authoritative
list here Wednesday of Wall Street analysts who follow
omitted at least one, Richard Jacobs of Janney Montgomery Scott in Philadelphia. Jacobs rates shares of Safeguard, the tech-oriented holding company that spawned
Internet Capital Group
Another observer of the huge disparity between the valuations of Safeguard and ICG offers this on-the-money assessment: "Safeguard is just not as tight a story. ICG is like a little Tiffany box, all wrapped up and ready to buy for the upcoming B2B season. Safeguard has no story."
Harsh, perhaps. But that's how the Street sees it, and that's how it is.
The Internet: Eventually Just Another Business
If you're like me, you're too busy to read every word
James J. Cramer
writes as soon as
publishes it. So in case you missed it, his analysis last week of
preannouncement of worse-than-expected third-quarter performance is worth a look. Cramer points out in
No Insulation on the Web that although the Internet
a better way of doing business, the technology doesn't change economic reality. Thus, E-Loan, suffering from a slowdown in mortgage refinancings, will miss its targets in its first quarter as a public company. That's a cardinal sin of new IPOs, as JJC points out. The first quarter is supposed to be in the bag. E-Loan's quarter must have been in someone else's bag.
In other words, no
investments, no flattering cover stories in
stewardship and no aggressive acquisitions can save a Net company whose industry (mortgages, in E-Loan's case) is ailing.
Come to think of it, I know why I liked Cramer's argument so much: I made it in June, before E-Loan went public. In an item titled
The Real World Intrudes on an Internet Company, I simply reprinted a portion of E-Loan's "risk" section in its prospectus that said, among other things, that "our failure to successfully reduce
our dependence on refinancings and increase the volume of our business derived from home purchases could have an adverse effect on our business."
Adverse indeed. E-Loan, shares of which levitated in the 50-plus range for a couple months this summer, ended Friday at 23 11/16, up 10% on the day but looking like a wounded Net stock all the same.
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Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at