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Past Editions Wall Street Journal - April 19, 2000
Founding Investors and Insiders Unloaded Tech Shares Before Fall
By MARK MAREMONT, TERZAH EWING and LAURA SAUNDERS EGODIGWE Staff Reporters of THE WALL STREET JOURNAL
This month's ugly plunge in technology stocks left many stunned investors wishing they had sold earlier, or at least lightened up on their tech portfolios.
But one group seems to have been more prescient: corporate insiders and early-stage investors in technology stocks. As the Nasdaq Composite Index roared toward its high on March 10, many of these people were selling at a heavy pace.
Owners of restricted shares -- mostly venture capitalists, founders and others who got in on the ground floor -- filed to sell $22.2 billion worth of their holdings in February. That was double the previous one-month record, and it was more than five times as much as in February 1999, according to First Call/Thomson Financial. Indications are that the March 2000 figure was second only to February's.
Sales by corporate insiders -- mostly officers and directors -- also soared. In February, insiders at the 100 large companies that make up the Nasdaq 100 sold $4.5 billion worth of shares. That was more than insiders in all U.S. stocks combined sold in February 1999, according to the Web site InsiderScores.com (www.insiderscores.com).
Stocks that saw feverish selling by insiders and early-stage investors in the first quarter include some flagbearers of the vaunted New Economy: Internet Capital Group Inc., Ariba Inc., Commerce One Inc., Akamai Technologies Inc. and Priceline.com Inc.
Consider Internet Capital Group, which finances Web start-ups and went public last August. In February and March, with its stock off its highs but still trading at between 16 and 24 times its IPO price, some insiders and ground-floor investors were cashing out. Beginning the first day that restrictions on the sale of their stock expired, this group filed to sell 17.2 million shares worth $2 billion, or 6.5% of the outstanding stock, atprices ranging from about $100 to $145. Internet Capital Group's 4 p.m. price on the Nasdaq Stock Market Tuesday was $41.
There is no reason to think that the various insiders and early investors knew a tech-stock plunge was imminent or that their selling caused it, except in the sense that all heavy selling puts pressure on a stock's price. Moreover, insiders and founding investors continue to have a huge investment in technology, riding it way down last week and part way back up this week.
And there are understandable reasons why such selling would be higher this February and March. The dollar amount of insiders' stock sales was naturally somewhat larger simply because tech stocks had soared so much higher, compared with early 1999. Also, last year was a boom year for tech-company initial public offerings, generating oodles of restricted stock held by pre-IPO holders, some of whom typically sell whenever they are free to. And in some cases, executives of young companies had been paid largely in stock or stock options, and wanted to sell some shares when they could.
Nonetheless, there's no question that the selling signified a big transfer of wealth from investors who were the best informed about particular companies to generally less-informed investors, including individuals. And it wasn't exactly a vote of confidence; you don't normally dump a stock if you think it's going higher. The heavy selling was something that could have been taken as a possible tip-off of bad things to come -- which is just how some savvy investors did take it.
Back to Earth
It wasn't just the smart money that was looking to cash out-sometimes it was the celebrity money. At Priceline.com, actor William Shatner was blanketing the airwaves in March with a pitch for the Internet retail-bidding site, which had given him options on 125,000 shares as part of his fee. But the former "Star Trek" captain, perhaps concerned at seeing the stock in the stratosphere, filed to sell 35,000 shares owned by a family trust in early March. They were trading at about $90 then.
Shortly thereafter, the shares returned to earth. Priceline.com stood at $64 in 4 p.m. Nasdaq trading Tuesday. Mr. Shatner says he "lightened" his position in the issue to balance his portfolio, which had become "a little overloaded" on stocks. "Priceline is a great stock," he adds, noting that he continues to hold most of his stake.
To level the playing field between the ordinary investor and those closest to a company, the officers and directors have to file with the Securities and Exchange Commission when they buy or sell shares. But a stock can move before these insider transactions are made public. Insiders don't have to disclose their trades until the 10th of the month following the month of the trade, so disclosure may not come for as long as 40 days.
That's why some investors also like to track filings of possible sales of restricted stock. This is unregistered stock that company founders and early investors get before the initial public offering. They can't sell it for a year, under SEC rules. To make it eligible for sale, the owners have to register the stock with the SEC, and the fact that they have registered it is made public immediately.
Registration doesn't prove the stock has been sold, but about 95% of the time that's the case, says Robert Gabele, director of insider research at First Call/Thomson Financial.
Mr. Gabele says the torrid February-March pace of such filings should have been "very alarming" to other investors, indicating that "a lot of people were getting very nervous about the market and were pulling the trigger." At InsiderScores.com, President Craig Columbus notes that "the classic sign of any market exhaustion is that money transfers hands from the most-sophisticated to the least-sophisticated participants."
One who read the warning signs was Fred Kobrick, chief executive of Kobrick Funds in Boston. He says heavy selling by those closest to technology companies was one reason he sold all but 10% of his funds' tech holdings beginning in February.
"When I saw it occurring in a lot of tech companies at a time when valuations were exorbitant anyway and I was already prone to be lightening on tech," he says, "it just put fuel on my fire."
The fuel came from investors such as Paul Allen, the Microsoft Corp. co-founder. He sold 40 million Microsoft shares in February and March, grossing $3.8 billion. Though the prices he got -- ranging from $90 to $101.19 -- were well off Microsoft's December closing high of more than $119, they were a good deal better than where Microsoft stands today, $80.56
Sophisticated investors also were among recent heavy sellers in Commerce One, a provider of "global e-commerce solutions" that went public last July at a split-adjusted price of $7 a share. Although the company had only $33.6 million of revenue last year and no profit, its shares roared to a closing high of $271.25 on March 9. At 4 p.m. Tuesday, they traded on Nasdaq at $82.375.
Pre-IPO investors couldn't sell their shares until late December. But between the time the brakes came off and the end of March, insiders and big early investors filed to sell more than 8.6 million shares, which made up about 11.3% of the total outstanding and were worth about $1.6 billion. The GE Capital unit of General Electric Co. filed to sell 1.3 million shares, worth about $265 million at the time. Insiders sold more than $230 million worth.
A Commerce One spokesman says insiders sold to diversify their portfolios. The chief executive of GE Equity, the GE Capital unit that made its investment, declines to discuss the trade except to say that "Commerce One continues to be viable business partner of GE Equity."
Paid in Shares
Then there's Ariba, a business-to-business software and services company, also with no profits and only modest revenue, where insiders sold 2.1 million shares in January and February. Kirk Cruikshank, vice president for strategic development, who joined Ariba when it acquired his employer earlier this year, sold 263,407 shares for $160.97 to $190.46 each. Tuesday's 4 p.m. price on Ariba: $64.75.
Mr. Cruikshank says that his sales represented about 65% of his holdings, but that investors shouldn't read anything into them because executives at his old company worked hard and took home little pay prior to the acquisition by Ariba. "I think whenever portions of your compensation are provided in stock, you as an executive want to be able to capture that compensation through liquidation or sale of your stock," he says. "But I chose not to sell all my stock. Ariba is a great company."
Some of the recent insider selling results from expiration of "lockup" agreements among last year's large crop of IPOs. Lockups are imposed by the underwriter, not the SEC. When a firm goes public, the underwriter customarily bars insiders, venture capitalists and others who got in on the ground floor from selling for a period, usually 180 days.
Lockup expirations inevitably result in some selling and often clobber the share price. "That brings out an unbelievable amount of stock supply," says Nick Moore, a portfolio manager and analyst at Jurika & Voyles LP in Oakland, Calif. Still, he says, it doesn't always pay to sell because insiders do. He says he has sometimes been burned doing that.
After last year's IPO boom, this has been quite a year for lockup expirations. In March, about $58.6 billion in stock that insiders couldn't previously sell because of lockups became available, according to Bradley Alford, who runs the Web site IPOLockup.com(www.ipolockup.com). There is a lot more to come. Based on shares' March 31 prices, he says an added $67.3 billion in locked-up insider stock is free to be sold in April and a huge $137 billion worth in May.
Released From Lockup
An underwriter can let shareholders out of a lockup early, and as tech stocks soared to potentially unsustainable heights, some underwriters did so. Such a move came in handy for some investors in Akamai Technologies, a provider of a way to speed Web-site performance. In late March, its shares traded at more than seven times the IPO price of five months earlier, but well off the high. Lead underwriter Morgan Stanley Dean Witter & Co. approved an early release from the lockup for about 2.2 million shares owned by "certain early-round investors" and "certain nonmanagement shareholders."
It was effective March 29. That day, shareholders filed to sell more than 1.3 million shares, worth about $265 million at the prior day's price. Akamai stock dropped nearly 10% on March 29, to $170. The shares traded at $91.50 on Nasdaq at 4 p.m. Tuesday.
The lockup release was meant to "control the number of shares that enter the market" by letting people sell some shares early in return for agreeing to hold a majority of their position beyond the original lockup date of April 26, an Akamai spokeswoman says. The move wasn't intended to benefit early-stage investors, she says, noting that "nobody is able to predict what will happen in the stock market."
Occasionally, if a company was put together about six months before it went public, the one-year SEC curb on selling restricted shares expires at about the same time as the six-month lockup imposed by the underwriter. That can unleash a torrent of selling, and it happened at Internet Capital Group, which was founded in 1996 but not incorporated until February 1999.
Among those who filed for possible sale of stock in ICG was technology guru Esther Dyson. The publisher of Release 1.0 newsletter, she is also a member of ICG's advisory board and bought shares in the firm before its August 1999 IPO, at prices lower than the split-adjusted offering price of $6. On March 6, Ms. Dyson filed to sell 25,000 shares for about $3.6 million, when the stock was trading at around $145. That was about 3 1/2 times its level at 4 p.m. Tuesday. Ms. Dyson didn't respond to requests for comment.
A spokeswoman for Internet Capital says that ma two ICG executives bought stock in January and February. "We've never felt better about prospects for the company," she says.
Insiders can sell stock for many reasons. Bill Gates, for example, regularly sells a small fraction of his Microsoft stock to diversify his holdings and fund his charitable foundation. In the first quarter, he sold $153 million of his Microsoft stock. According to First Call/Thomson Financial, he still has 742 million shares.
Meanwhile, the technology pioneer in late February was loading up on stock in one very Old Economy company: He bought an 8% stake in Newport News Shipbuilding Inc.