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February 1, 2001

Venture Capital Jail Break?

By Omar Sacirbey

Also in this article

  • Venture Capital Jail Break?
  • Page 2

A total of 153 lockup periods accounting for roughly 3.7 billion shares will have expired by the end of March, according to Thomson Financial/Carson. The bulk of those - more than 1.9 billion shares - were released in the final 16 days of last month.

Leading the way were communications equipment maker Corvis Corp. (Nasdaq: CORV) and healthcare products producer Bruker Daltonics (Nasdaq: BDAL). Corvis' expiration unlocked about 255 million shares, while Bruker Daltonics' unlocked another 455 million shares. The two companies account for almost 37 percent of all shares unlocked during the remainder of the month.

Shares are "unlocked" whenever the principal shareholders - usually insiders and venture capitalists - exercise a right to sell their shares onto the open market. Lockup periods vary but often last 180 days. The principal shareholders do not always unlock their shares, however.

Battered Market

Understandably, the extraordinary number of shares currently unlocked has some analysts worried that the law of supply and demand will take its toll on a battered market.

"You can expect a lot of downward pressure," said Dan McCarthy, a market analyst with

But while it may seem logical that prices go up when fewer shares are hitting the market, and go down when there is an influx of shares, the numbers do not always support this theory. For example, during the first three months of 2000, when the markets were pushing upward, there were 208 expirations unlocking in excess of 5.08 billion shares.

During the final three months of the year, however, there were only 150 lockup expirations, freeing slightly more than 2.92 billion shares. Given what happened to the markets during the final quarter of 2000, the supply and demand theory still seems in question.

With share prices of the many upcoming lockup shares struggling, the possibility that principal shareholders and insiders will hold onto their shares is all the more likely. Indeed, the 16 expirations that unlocked 330 million shares in the early weeks of this year, resulted in minimal selling.

"When new shares are released, that sends a message that underwriters don't want to send," said Mark Littenberg, a partner and head of the Internet and New Media Group at Schulte Roth & Zabel, a New York-based law firm.

According to a study by professors Laura Casares Field and Gordon Hanka, of Pennsylvania State University's Smeal Business School (which examined the lockup expirations of some 3,000 companies that went public from 1988 to 1997), the average firm's stock price lost two percent in the week the lockup expired. The loss was four percent for companies that had several venture capital investors.

The study notes: "There is a statistically prominent cumulative average abnormal return of minus two percent in the week the lockup agreement expires, about half of which occurs on the unlock day. We find that the result holds over our entire ten-year period and that it is robust to various sample specifications...the average unlock day return is more negative for high-tech firms, but this result is not robust and seems to be related to venture financing. The unlock day abnormal return does not depend strongly on firm size, quality of the underwriter or exchange."