Tuesday, September 5, 2000
A few years ago, the expiration of the 180-day lock-up on insider
shares following an IPO was a surefire sign that a company's stock would go
down, as venture investors got their first opportunity to sell out of generally
illiquid stocks. While the situation has improved in this bull biotech market,
companies coming off lock-ups still face about a 50-50 chance that their stock
prices will fall in the two weeks before and after the lock-up ends.
For four U.S. IPOs completed in the first three quarters of
1999, three traded up in the week prior to the expiration of their lock-ups,
when other investors used to sell ahead of the event, while only one traded
down (see "Lock-up Performance"). In the week after the end of the lock-up,
two were up and two were down.
The pattern has been similarly mixed for companies that have
gone public since the financing window opened in the fourth quarter of 1999.
Of the six companies whose lock-ups have ended, four were down in the week prior
while two were up. In the week following, three were up and three were down.
Nonetheless, according to Chase H&Q banker Vivek Jain,
"the effect of the lock-up is much less severe then a couple of years ago."
In particular, he said biotech companies going public today are more liquid.
As a consequence, pre-IPO shareholders are less anxious to sell.
CIBC World Markets banker Peter Crowley agreed. "Bigger deals
this year are giving more liquidity, which could serve to stabilize the company's
price near the lock-up expiration," he said. "This is a different scenario from
the IPOs of the early 1990s in which companies were raising $30 million with
$100 million pre-money valuations - there was much less liquidity at that time."
"Compared to five years ago, people now are sitting on a much
larger gain," Lehman Brothers banker Eric Roberts added. "The increase in biotech
valuations and the liquidity of the market have made it easier for private investors
to sell, so they are choosing to do so at a prudent time." These days, Roberts
said, "IPO lock-up expiration dates are definitely a risk, but for three out
of four companies it is a non-event."
Crowley did caution that "there's been growing interest on
the part of venture firms to get out earlier, and if a given IPO is beating
a fund's average, the fund may dump the stock - limited partners like to see
On the other hand, Roberts said venture firms "don't want the
reputation of investing and selling right away. So the VCs are selling over
time and they are careful not to spook the market."
Managing the transition
Companies and underwriters also are becoming more proactive
in thinking about ways to smooth the transition when large blocks of shares
become available for sale. Rather than passively waiting for their stocks to