Skip to main content

You Know About the IPO Lockup, but What About the Merger Lockup?

Also, an update on Midway Games and reader revolt.


Love those lockups: One of the most popular games for real and pseudo traders is to short stocks that have recently gone public right before the so-called lockup period ends. All those shares coming onto the market can cause the stock to take a tumble. Just take a look at the recent action in


(EBAY) - Get Free Report


A not-so-popular version of the same game: targeting the lockup release for investors in companies acquired, in a stock swap, by a public company. That can be especially critical today, considering the way Internet companies have been actively using their sky-high prices as currency to lure sellers who want to become instant millionaires.

There have been dozens and dozens of deals, of course, and each holds the possibility of creating an overhang of stock that can suddenly surge into the market. The rules, however, can be very tricky. Bruce Mann, senior securities partner at law firm

Morrison & Foerster

in San Francisco, says factors that must be considered include whether the shares that were swapped as currency were registered, and whether the deal was done under the purchase or pooling method of accounting. (Different restrictions apply to each.) And it's all generally spelled out in a company's merger agreement.

However, chances are you'll need to be somewhat of a detective to find it. Your best bet: Go to any


Edgar site and look at 8-Ks filed within days of the deal, or 10-Qs immediately following the deal. In either of those documents, you're looking for the actual merger agreement. It'll be labeled, and it'll include more legalese than you can probably stomach.

A fairly common example is



purchase, a year ago yesterday, of


. The merger agreement was included in an 8-K filed a week after the deal closed. In that document the company said it planned to register its shares shortly after the deal closed. In that type of situation, Mann says, investors would have been able to sell their shares as soon as the registration statement became effective. And they could sell into the open market at any time without making additional filings with the SEC.

The primary exceptions: when a deal is accounted for under the pooling method of accounting, or when all of the stock goes to just one or two people. Under a pooling, insiders can't sell until the acquiring company has reported earnings for a quarter that includes at least one month of the combined operations. And they're limited in the amount they can sell.

Confused? Go hire an attorney to decipher it. That's what hedge funds and other sophisticated investors do.


An item

here a week ago questioned the timing of several key

Midway Games


insiders selling shares in cousin company

WMS Industries

(WMS) - Get Free Report

and buying into Midway. WMS had turned into a better stock. CEO Neil Nicastro, however, insisted Midway insiders were buying shares and that it would soon become evident.

Indeed they did: Nicastro and four other execs purchased a total of 432,060 shares in January for $9.4 million.

Reader revolt:


item on



value relative to


(LU) - Get Free Report

drew plenty of comments. Many were like Josh Stern's, who said Lucent warrants the premium because most of its top scientists came from

Bell Labs

. TeckTrader griped, "Stick to picking on companies no one's ever heard of, bubba. These big conglomerates are out of your league." Bill Klepper adds, "I enjoyed your insights when I first read your columns. But now your columns and TV appearances are sound bites -- like 'Nortel's CEO is an engineer and Lucent's is a salesman.'" (Sorry, Bill, but the salesman bit may seem trivial, but it carries more clout than you apparently think; Lucent's strong public relations and marketing vs. virtually nothing at Nortel isn't a coincidence.)

As for another

item that questioned whether you should ever invest in a company run by a CEO who uses a kid's nickname, Tommy Winberry wrote, "A surprisingly childish low blow -- especially from someone named after a plant family."

On that note, have a great, long weekend.

Herb Greenberg writes daily for In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.