Next Thursday, 4.6 million shares of Google, which are owned by insiders, are released from a “lock-up period.”

That gives the green light to a handful of Google’s insiders to dump their stock into the market starting on September 2.

The lock-up period is not to be confused with the “quiet period.” The latter was recently made famous by the Playboy interview of Google’s founders Sergey Brin and Larry Page.

The lock-up period is an agreement – not a Securities and Exchange Commission rule.

To be specific, the lock-up period is an agreement between the insider shareholders and the lead manager. The insiders agree not to sell their shares before a specified date. The reason is to keep insiders from bailing out of their holdings just after their company goes public.

The lock-up period can vary from deal to deal. In small-cap offerings, it generally runs as long as 360 days. But in most offerings, the lock-up period runs for 180 days.

From time to time, there have been reports of an IPO running into sharp selling before the expiration of the lock-up period. After all, if insiders are going to dump millions of shares into the market, which would drive the stock price lower, why stay with the stock before it collapses?

The long and the short of it is this: There are no statistics to support this claim. IPOs do not routinely plunge when the expiration date looms on the horizon. This isn’t to say IPOs haven’t sold off ahead of the expiration date, but it was due to a slumping stock market or negative corporate news. It had nothing to do with the expiration of the lock-up period.

And besides, who says these insiders will dump their stock and lose control of the company?

Escape clause

The fact is that insiders don’t have to wait out the 180-day lock-up period before cashing out of some of their stock. There is a loophole in the prospectus. The following is an excerpt from the prospectus of a recently priced IPO:

We, each of our officers and directors and holders of a majority of our common stock have agreed, with limited exceptions, not to sell or transfer any shares of our common stock for 180 days after the date of the final prospectus without first obtaining the written consent of (the lead manager).

There is the key: “…without first obtaining the written consent of (the lead manager).”

As a result, Wall Street professionals pay little attention to the lock-up period. It just doesn’t matter… much.

One veteran corporate finance officer, who asked not to be identified, said: “The lock-up period means nothing. If the insiders want to bail out ahead of the 180-day lock-up period, all they have to do is go back to the manager and twist an arm to file for a follow-on offering. Since the manager stands to make another underwriting fee, it’s a done deal.”

There seems to be some truth in this statement.

There have not been very many follow-on offerings from today’s IPO market. But the Nasdaq Composite Index hasn’t been friendly, either.

From high to low in 2004, the Nasdaq fell 18.6 percent. That’s crowding close to bear-market territory. The Nasdaq closed at its 2004 high on January 26, at 2,153.83. It hit its closing low for the year at 1,752.49, on August 12. On Thursday, it closed at 1,852.92.

Four get trigger happy

Nevertheless, a few insiders have jumped the gun on their 180-day lock-up periods. Consider the following:

EYETECH PHARMACEUTICALS

JANUARY 29, 2004

·          Eyetech Pharmaceuticals is a New York City-based biopharmaceutical company engaged in the development and commercialization of novel therapeutics to treat diseases of the eye.

·          On January 29, Eyetech Pharmaceuticals priced its IPO of 6.5 million shares at $21 each to raise $136.5 million.

·          Eyetech Pharmaceuticals sold all the shares in the offering.

·          The underwriting discount was: $9,555,000.

·          The 180-day lock-up period ended on July 28.

MAY 27, 2004

·          Eyetech Pharmaceuticals priced a follow-on offering of 3.86 million shares at $38.50 each to raise $148.6 million.

·          Selling shareholders sold all the shares in the offering.

·          The underwriting discount: $8,545,268.

·          Eyetech Pharmaceuticals recently traded at about $38 per share, up 80.9 percent from its IPO price, but down $0.50 per share from its follow-on offering price.

OPEN SOLUTIONS

NOVEMBER 25, 2003

·          Open Solutions is a Glastonbury, Connecticut-based software and services provider to financial institutions.

·          On November 25, 2003, Open Solutions priced its IPO of 5 million shares at $17 each to raise $85 million.

·          Open Solutions offered 4,820,000 shares and selling shareholders offered 180,000 shares.

·          The underwriting discount: $5,950,000.

·          The 180-day lock-up period ended on May 24.

MAY 18, 2004

·          Open Solutions priced a follow-on offering of 4,436,442 shares at $23.47 each to raise $104.1 million.

·          Open Solutions sold 1,000,000 shares and selling shareholders sold 3,436,442 shares in the offering.

·          The underwriting discount: $4,769,175.

·          Open Solutions recently traded at about $22 per share, up 29.4 percent from its IPO price, but down $1.47 per share from its follow-on offering price.

TESSERA TECHNOLOGIESNOVEMBER 12, 2003

·          Tessera Technologies is a San Jose, California-based developer of semiconductor packaging.

·          On November 12, 2003, Tessera Technologies priced its IPO of 7.5 million shares at $13 each to raise $97.5 million.

·          Tessera Technologies offered 3 million shares and selling shareholders offered 4.5 million shares.

·          The underwriting discount: $6,825,000.

·          The 180-day lock-up period ended on May 11.

MARCH 26, 2004

·          Tessera Technologies priced a follow-on offering of 4.1 million shares at $18.43 each to raise $75,563,000.

·          Selling shareholders sold all the shares in the offering.

·          The underwriting discount: $3,690,000.

·          Tessera Technologies recently traded at about $18 per share, up 38.5 percent from its IPO price, but down $0.43 per share from its follow-on offering price.

UNIVERSAL TECHNOLOGICAL INSTITUTE       

DECEMBER 16, 2004

·          Universal Technologies Institute is a Phoenix-based provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle, and marine technicians.

·          On December 16, Universal Technological Institute priced its IPO of 7.5 million shares at $20.50 each to raise $153.8 million.

·          Universal Technological Institute sold all the shares in the offering.

·          The underwriting discount: $10,762,500.

·          The 180-day lock-up period ended on June 14.

APRIL 27, 2004

·          Universal Technological Institute priced a follow-on offering of 5.5 million at $40 each to raise $220 million.

·          Selling shareholders sold all the shares in the offering.

·          The underwriting discount: $9,900,000.

·          Universal Technological Institute recently traded at about $26.50 per share, up 29.3 percent from its IPO price, but down 33.8 percent from its follow-on offering price.

Serial thriller

Now back to Google. The September 2 date is just the start of Google’s lock-up periods.

The rest are:

·          November 17, or 90 days after the offering date, 39.1 million shares are free.

·          December 17, or 120 days after the offering date, 24.9 million shares are free.

·          January 16, 2005, or 150 days after the offering date, 24.9 million shares are free.

·          February 15, 2005, or 180 days after the offering date, 176.9 million shares are free.

If the past is any guideline to the future, there might not be a need to worry about Google’s insiders flooding the stock market with upwards to 270.4 million shares with the expiration of its serial “lock-up” periods.

Insiders have been know to cash out of some stock through follow-on offerings, not to nickel and dime their stock into the open market over a period of time. That’ll kill the stock’s appreciation.

To blab or not to blab

But let’s go back to the “quiet period.” The “quiet period” is in Section 5 of the Securities Act of 1933. Basically, it prohibits companies, their underwriters, and the selling group members (brokers) of promoting the stock until after the deal is out of registration for a period of 25 days. Recently, the quiet period was amended to a 40-day period for the company and the lead managers. For the other underwriters and selling group members, the 25-day quiet period still stands.

Upon expiration of the “quiet period,” one can expect an IPO’s managing underwriters to initiate research coverage. In the small-cap deals, don’t expect any follow-up research on the company.

For the Google IPO, the “25-day quiet period” ends on September 13. The 40-day “quiet period” ends on September 28.

Nevertheless, several brokers have already initiated research coverage of Google. The “quiet period” rule does not apply to brokers not involved in the underwriting and selling of the IPO.  

Here is a consensus:

Number of brokers initiating research: 4

Average recommendation: “Buy”

Average price target: $115 per share

Consensus earnings per share:

December 31, 2003A: $0.77

December 31, 2004E: $1.32

December 31, 2005E: $2.28

December 31, 2006E: $3.02

A: Actual

E: Estimated

Since going public, Google has sold at a high of $113.48 per share, traded at a low of $95.96 per share, and closed Thursday, August 27, at $107.91 per share – up nearly 27 percent from its initial offering price.

Nevertheless, circle Thursday, September 2. That’s the day 4.6 million Google shares emerge from the first of five lock-up periods.