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Net Stock Summit: Lockout Quandary

Figuring out where stock prices may go after insiders sell is not easy

The public's appetite for Net stocks will be tested soon as more shares in newly public Internet stocks will be available shortly.

All newly public companies have a "lockup" agreement, a standard feature of initial public offerings, which means that early investors, including senior management and venture capitalists, promise their investment banker underwriters that they won't sell their shares for a certain period after the company goes public. The company insiders are thus "locked up" until a fixed date, usually six months after the IPO.

Well, some major stocks have come out of lockups recently, and early shareholders are selling. The question is, what will all this new stock -- plus impending IPOs and follow-on offerings from other companies -- do to the Internet stock sector?

Since Feb. 3, shareholders in


have filed with the

Securities and Exchange Commission

their intention to sell 1.3 million shares in the company. This adds 44% to the initial float of 2.9 million shares. Early


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shareholders are also selling 1.4 million shares, adding more than 34% to original float. With those two companies alone, that's more than $570 million in new stock on the market, at the intended selling price. closed at 58 3/16 on Wednesday, down 3 1/4, and eBay closed at 233, up 1 7/8.

Some investors have

pointed out that a stock often falls in the month before a stock's lockup is due to expire.

Although the appetite for Internet stocks among both institutional and retail investors may be sated, the pricing impact is difficult to measure, though it may end up with the stocks' descent.

"Supply is clearly going up," says Lise Buyer, Internet analyst at

Credit Suisse First Boston

. And that's had an effect on Internet stocks of late, she says. "They didn't used to go down. Now they do."

But not everyone is so sure that new stock on the market is having such an effect. Ryan Jacob, portfolio manager of

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The Internet Fund, doesn't attribute the recent pullback of Internet stocks to new shares on the market.

"I'm not a real big believer in that," he says. "A lot of it is more based on sentiment than supply and demand." Although the number of Internet stocks has been increasing, he says, the additional float, expressed as absolute dollars, is relatively small.

Given the size of the Internet market, it does look difficult for individual stocks to have major impact on market supply. A Feb. 4 report from

Goldman Sachs

calculated that the tradeable float of Net stocks was $136 billion, with

America Online


accounting for more than $60 billion. In that arena, the addition of nearly half a billion dollars worth of new shares in and eBay does seem small. Even the $778 million that selling shareholders in

Network Solutions


raised earlier this month -- in what was said to be the largest Internet public stock offering ever -- seems puny.

And although the end of a lockup can spook investors, the impact can be temporary. For example, from early November through early February, early shareholders of



sold nearly 3 million shares in stock, according to an analysis of SEC Form 144 filings by Paul Elliott, research analyst at

First Call Investnet

, which tracks insider filings. That's more than 45% of the 6.5 million shares that DoubleClick sold in its February 1998 IPO and in a December follow-up offering.

But new shares on the market don't seem to have hurt DoubleClick. The company's stock has more than doubled since early December, at the time of its last public offering, though the stock is off from its 52-week high.

The sentiment-driven volatility of the Internet sector is heightened, says Jacob, by the startup nature of so many Internet companies. "Lack of earnings or cash flow makes valuation somewhat subjective, and lends itself to increased volatility," Jacob says. Without the usual yardsticks for measuring companies' performance, investors rely more on gut feelings to figure out how high or low a stock price can go. And those gut feelings are more prone to change than earnings-based valuations.

That being said, new stock on the market will have an effect, Jacob says. Small- and mid-cap Internet names will continue to be volatile, but larger Internet names will be less so, he says. "Increased liquidity will help dampen the volatility, no question."

Kevin Landis, portfolio manager of the


Technology Leaders Fund, says that unlocked stocks, along with secondary offerings that increase companies' floats, move the control of stock pricing away from the short-term realm of traders and more toward the long-term power of portfolio managers and the investment market. "I don't know if this means that the stocks are headed down," he says. But compared to the situation with Internet stocks two or three months ago, he says, "It's pretty safe to say that they're more likely to seek their true level now."

Some caveats about the lock-up chart below, an updated version of a chart originally printed in January. One, the listed floats, obtained from Market Guide or company filings, may not all take into account additional shares sold because of over-allotments. Two, the dates listed in the chart, calculated from information in each company's prospectus, may not be the actual day the lockup expires. Our earlier chart listed's lockup expiration as Jan. 12, but the first seller of restricted stock didn't file until Feb. 3. A likely reason there was no earlier selling was that insiders had to wait until announced its fourth-quarter financials on Jan. 28; a spokeswoman says the company does have policies that govern stock sales beyond the lockout, but she wouldn't disclose those policies.

*Assuming 3-month daily trading average as published by Market Guide. 1Expected to be acquired by Yahoo!
2Had secondary 12/10/98; lock-up on additional 7.5 million shares expires 3/10/99.
3Includes 3.4 million shares eligible for sale 5/22/98 and 8.0 million shares the company intends to register when lockup expires.¿
4 In agreement to be merged with Lycos.
5Stock will be distributed to shareholders in parent MALL.