LONDON -- This year, many leading European Internet companies' performance has been disappointing, to say the least. Now a combination of changes in the way European stock indices are calculated, together with the end of lockup periods for major shareholders, could make a bad situation even worse.

The lockup periods for many European Internet companies that went public this year, such as

Deutsche Telekom's

( DT)



France Telecom's



, have just come or are coming due,

Credit Suisse First Boston

analysts noted in a report this week.

While the issue of additional liquidity is not confined to Internet stocks, they are particularly vulnerable due to a tendency to have core groups of shareholders, some of whom CSFB expects will sell all or part of their holdings.

Furthermore, CSFB says, "Given the limited free-float of most European Internet companies, the sale of shares by the original investors represents considerable stock overhang since the effective free-float will increase substantially." (Overhang is a large block of stocks that if released on the market puts downward pressure on prices.)

For example, as part of its acquisition of

, T-Online issued 15 million shares to


,'s founder, and to its employees. One third of Jazztel's stake will be unlocked on Oct. 17 and the remainder on Dec. 1. CSFB does not believe Jazztel is a long-term shareholder in T-Online because of T-Online's focus on consumers and Jazztel's focus on business customers,

Similarly, Wanadoo's partners in Holland have agreed to a lockup until Oct. 21 and its Spanish partners, until Jan 18. Given that the majority of these investors are financial institutions, including


( ABN) and


, CSFB does not see them as long-term holders of their Wanadoo shares.

The situation is further complicated by moves under way by major index compilers in Europe to recalculate their indices to take into account only the constituents' free float (the amount of shares actually available for investors to trade on the open market) and not the full market cap. This will reduce the weighting of many companies, especially the Internet concerns, in the indices. As a result, passive or index-tracking investors, who previously were obliged to own a large proportion of the available supply, which in turn increased the scarcity of stock for other investors, will now have to reweight their portfolios accordingly.

On Monday, the firm that compiles the


indices, such as the

Dow Jones Stoxx 50 Index

, moved to a free-float basis, reducing significantly the weighting of those companies with a small free float such as T-Online and the U.K. Internet service provider and portal

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When it occurred earlier this week, the effect of the Stoxx's move was limited largely because many fund managers had reweighted their portfolios well in advance of the actual change. However, the prospect of indices from

Morgan Stanley Capital International

-- which is currently in a consulting process about the change -- moving to such a free-float basis is expected to have the biggest impact on those stocks with a limited free float. This is because MSCI has the most tracker funds following them.

Of course, issues such as lockups are often short-term factors affecting shares. But not, alas, if the investment sentiment surrounding the stock is negative.

"If things are moving forward in the market then these overhangs can be swallowed," says Peter Misek, an analyst at

Chase H&Q

. "If not, then it tends to exacerbate the problem."

And what of today's situation with Europe's Internet stocks? "Not fantastic," he says.

An understatement.

International Assets Holding Corp.'s



-- an index designed to track the average performance of 40 Internet stocks outside the U.S. in much the same way that Internet Sector Index

does for U.S. Internet firms -- has lost 45% of its value since the beginning of this year.

And within that index it is the pure plays such as the European ISPs and portals that are getting hit the hardest. Freeserve has fallen 40% from its high hit earlier this year.

"Short term, we are definitely going to see some more volatility in this sector," predicts Mike Ward, a fund manager of IAAC's

Global e-Fund

, which holds many of the stocks in the NETDEX.

Nevertheless, Ward says that while his fund is aware of this stock overhang and clearly has some concerns, "We do see it as a short-term event, and we won't really make a trade based on it." And CSFB even attempts to justify the relative expensiveness of Europe's ISPs and portals compared with their U.S. cousins such as







"European Internet ISPs and portals trade at a significant premium compared with their U.S. counterparts based on most metrics -- although we believe that a premium is partially justified by the higher growth rates we are forecasting for Europe," the CSFB report says.

Yet the word "potential" offers cold comfort for those investors stuck holding paper that has lost 50% of its value in little more than six months, and with the short-term outlook at the very least looking singularly gloomy, selling these stocks at today's prices may make a bad situation slightly better.