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Avoid the Secondary Offering and Lock-Up Period Pitfalls

New supplies of stock can drag down value


When a company goes public — especially in an emerging industry — it’s important to have a nice spike on the first day of trading.  In a sense, this is a show of strength as well as a media event.

Here’s a look at some of the notable first-day performers for 2011:

Company Return
LinkedIn 109.4%
Zillow 78.9%
Groupon 30%
Angie’s List 25%

Part of these pops came from investors’ excitement to juice up their portfolios with growth plays.  But there has been another catalyst:  Wall Street underwriters have generally issued small amounts of shares.  In fact, for the companies in the table above, it was routine to float less than 10% of the outstanding shares.

The problem is that eventually a deluge of shares will hit the market.  After 180 days from a company’s IPO, so-called lock-up contracts will expire, meaning insiders will be able to unload their shares.

What’s more, a company will likely pull off a secondary offering, which involves selling directly to the public.

Last week, LinkedIn (NYSE:LNKD) had a secondary offering for 8 million shares that saw venture capitalists and senior executives lightening up their holdings.

Then, this past Monday, the lock-up contracts expired, and 24 million shares became available for sale.

Since late October, the shares have plunged to $66 from $94. While the stock was pressured from the overall volatility in the markets, it seems reasonable that investors are concerned about the sudden jump in the supply of new stock.

The same thing happened to Fusion-io (NYSE:FIO).  This week, the company announced the terms of its secondary offering: It will issue 8.8 million shares at nearly a 9% discount.  So far this week, the shares are down 21%.

Interestingly enough, the secondary/lock-up phenomenon could represent a nice opportunity for short-sellers.  They will find many more available shares to borrow for their positions.  And it could mean a lower risk for “short squeezes.”

Thus, for IPO investors, it’s a good idea to set your calendar for lock-ups.  It could help prevent a nasty hit to your portfolio.

Here’s a look at some of the upcoming lock-up expirations:

Company Lock-Up Expiration
Pandora (NYSE:P) 12/12/2011
HomeAway (Nasdaq:AWAY) 12/26/2011
Bankrate (Nasdaq:RATE) 12/14/2011
Skullcandy (Nasdaq:SKUL) 1/16/2012
Zillow (Nasdaq:Z) 1/16/2012
Dunkin’ Brands (Nasdaq:DNDN) 1/23/2012
Teavana (NYSE:TEA) 1/24/2012
Tudou (Nasdaq:TUDO) 2/13/2012


Article printed from InvestorPlace Media,

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