Juniper's Perk: A Shorter Lockup Period

Insiders at the networking IPO are getting a rare chance to sell their shares before the standard 180-day lockup period ends.
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SAN FRANCISCO -- Officers, directors and financial backers of Juniper Networks have won the right to sell a good chunk of their shares before the company's official lockup ends Dec. 1, according to filings made with the Securities and Exchange Commission.

Juniper wielded its clout with lead underwriter

Goldman Sachs

to trim its six-month lockup of stock, which started when the company filed its final prospectus on June 4. The IPO is set to go June 24. Juniper's executives and underwriters appear to be wagering that Wall Street's demand for shares of the network-equipment maker will be strong enough to weather early insider selling.

Often a warning of concerns among key shareholders, insider selling can also demonstrate strong market interest in an IPO, especially when underwriters allow it to happen before the traditional lockup ends. In Juniper's case, the move seems a bold gambit that interest in its stock will remain strong through at least November. Already, the 3-year-old upstart, known for luring away some of

Cisco's

(CSCO) - Get Report

best software engineers to build a new network router, has drawn

keen interest from the investor community.

"It's another sign of an overheated tech market," says one investment banker not involved in the underwriting but familiar with the deal.

With few exceptions, investment bankers lock up their client's holdings for 180 days to test investors' appetite for shares and to help control liquidity during the stock's infancy. When Wall Street's reception of an IPO promises to be unusually warm, the banker might permit insiders to sell shares to the market before six months is up. Last year,

Morgan Stanley Dean Witter

allowed nonofficer employees of

Broadcom

to sell in August, several weeks before its six-month lockup expired. (That kind of action isn't unusual.) Shares of Broadcom have risen nearly fourfold since then.

But while perfectly legal, not many companies have exacted this privilege from their bankers right off the bat. One rare case is Internet auctioneer

eBay

(EBAY) - Get Report

, which signed Goldman to a four-month lockup before it went public in September 1998.

Now Juniper has cut a similar deal with Goldman, which three industry sources say reflects its marquee status. "They could ask for something and get it," says another investment banker who is also familiar with the deal. "Some companies want hired jets for their road show. Some want closing dinners in Hawaii." Only popular clients enjoy such treatment, he says.

Juniper and stockholders, including

Crosspoint Venture Partners

, expect to issue 4.8 million shares June 24, leaving 49.4 million shares outstanding after the offering. At an estimated price of $21 to $23 per share, the offering would value the company at just over $1 billion, compared to revenue of $3.8 million and a net loss of $31 million in 1998.

Juniper insiders evidently want more flexibility to trade their holdings. CEO Scott Kriens (who will own 6.4% of the company after the IPO), venture-capital giant

Kleiner Perkins Caufield & Byers

(which will own a 21.9% stake) and other stockholders will need to wait about four months to start selling shares. According to SEC filings, when the company reports third-quarter earnings Oct. 25 as planned, those stockholders will be free to unload as much as 6 million shares in late October and 10 million shares in late November, even though the official 180-day lockup won't end until Dec. 1. That's a lot of stock, even though federal rules will limit individual sales based on average trading volume and the number of shares outstanding.

Officials with Juniper and Goldman declined to comment, citing a quiet period enforced by the SEC. Other shareholders downplay the risk of the move. Once given the right to sell, Juniper's owners will be able to demonstrate more clearly their confidence in the stock, according to a venture capitalist who is invested in Juniper. "We believe in the company and don't anticipate that there will be anything but a willingness to hold the shares," says the venture capitalist, who declined to be identified.

If eBay is any precedent, investors should view Juniper's deal as a bullish indicator. The press fretted that the Internet auctioneer was out to flip quick profits for its executives. But insiders didn't dump en masse when the lockup expired, and outside investors kept buying, according to Bob Gabele, director of the insider-trading research division of

First Call/Thompson Financial

. Adjusting for stock splits, eBay is trading at 30 times its IPO price.

Still, it would seem that selling will ensue. "That's a rather liberal use of the lockup constraint," says Gabele. "It would seem that there are some plans afoot at the company to unload more than the average number of shares."

In this market at least, such selling might not weigh down the stock, Gabele says.

"Up to now, the track record has been pretty strong" for popular tech IPOs that opt for a shorter lockup, says Gabele. Juniper will provide another "barometer for the market."