Commerce One May Find Itself Between a Lockup and a Hard Place

As the company's lockup ends and the year-end looms, Commerce One shares could face selling pressure.
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Commerce One


, up a breathtaking 800% since late August, may hit a speed bump when its lockup expires later this month.

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and Commerce One are approaching the end of their lockups, the 180 days after an IPO during which employees and early investors cannot sell shares.

Commerce One's lockup is notable because the large number of shares available for sale, coupled with the stock's huge surge and a temptation to lock in end-of-the-year gains, has set the stage for a flood of new shares in the market -- despite confidence among investors about its longer-term growth. More than 12 million Commerce One shares will come out of lockup on Dec. 28, equal to 3.6 times the 3.3 million shares now available for trading. Another 6.9 million shares will be available for trading by July 1.

When the shares come out of the lockup, insiders can sell them on the open market, a move that often temporarily

pushes shares down.



shares dropped nearly 50% when its lockup expired in August. The


lost 9% over the same period. While VerticalNet has since come back with a vengeance, such a slump underscores the volatility of recent IPOs in a market marked by momentum trading.

Unlike VerticalNet, timing is a factor with Commerce One's lockup. With its lockup expiring just days before year-end, some managers may sell shares to secure gains and shore up the end-of-year valuations of their portfolios. Most funds calculate their 1999 performance on Dec. 31. And even the mild concerns about volatility that the Y2K crisis could cause during year-end trading could prompt some investors to lock in their gains.

Fund managers "may not want to jeopardize gains on something that might sell off at the end of the year," says Scott Cooley, a funds analyst at


. If the stock declines as the year ends and the manager held the stock, the lower value will show up in that fund's performance. "But if they sell and then it falls, they'll lock in higher gains."

Morningstar couldn't be reached to comment on which funds hold locked shares. Investors that put money into Commerce One before the IPO include

Canaan Partners


Morgan Stanley Dean Witter Venture Partners


Foundation Capital

. Nearly 60 other institutions held shares as of Sept. 30, according to

, which tracks institutional holdings.

This potential stock decline comes as Commerce One transforms itself from a software company to a services company -- a shift that could strengthen its prospects in coming quarters, although it's not clear when the company will start to see the benefits of its purchase of


. That Nov. 5 acquisition of CommerceBid marked Commerce One's foray into corporate auctions. Last month, Commerce One's CFO Peter Pervere said at an investment conference that auction fees would make up about 25% to 30% of revenue in 2001 or 2002. In the most recent quarter ended Sept. 30, 75% of the company's $10.4 million in revenue came from licensing its B2B software. The remaining 25% came from service fees.

Whether that will be enough to keep investors thrilled remains to be seen. Commerce One's third-quarter revenue grew 147% from the second quarter, marking the third consecutive quarter that sequential revenue more than doubled. But Pervere says that can't last, calling for a "modest increase" in revenue this quarter. A consensus of three analysts expects revenue to rise 21% this quarter, according to

IBES International


"What's more important," says a fund manager who holds shares, "is what customers they sign up in the quarter." That's where the long-term revenue opportunity lies, he says. This quarter, relationships were announced with

General Motors

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. And the company will

announce a deal with



on Dec. 20.

The company's foray into auctions is the best hope for sustained revenue growth. Like


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, Commerce One will take a flat fee for the auction and then a percentage of the sale.

Forrester Research

predicts B2B auction sales will increase to $52 billion in 2002 from $8.7 billion in 1998.

"Reverse auction is going to be huge for major players," says Gary Gratny, a money manager at

Whelan & Gratny Capital Management

, who holds shares of Commerce One. "And Commerce One will be a major player."

That could be true in the long run, but in the short term, uncertainty may keep this stock at bay.