Traders of U.S. Web company shares have learned a harsh lesson in supply and demand this week.
LinkedIn, the social network focused on professionals, and Groupon the online coupon seller, had strong first-day share price “pops” in their initial public offerings this year. Partly they were the result of selling small numbers of shares, putting them in the hands of the most eager investors.
But now, LinkedIn has fallen 27 per cent to $66 (U.S.) since it announced a large secondary offering of shares in early November. Additionally, its required post-IPO six-month period known as the “lockup,” during which insiders such as pre-IPO investors and executives cannot sell, ended last weekend.
That has sparked a wave of selling of other recent IPOs that face similar looming supply gluts. Groupon fell below its November IPO price of $20 to $16.96, down 35 per cent this week to Wednesday’s close.
Groupon’s own lockup does not end until well into 2012, nor do lockups for Pandora Media, the streaming music site, or Ubiquiti Networks, the maker of wireless networks. But their shares were down 18.4 per cent and 12.4 per cent this week, respectively.
“We knew that was the deal with these companies, but in a bear market the worry has risen to a level of frenzy that you wouldn’t see in normal times,” says Hugh Evans, small-cap manager at T Rowe Price, whose funds own Groupon shares.
Though the U.S. IPO market has rebounded from its post-crisis nadir, the market remains choppy. A record 34 per cent of offerings have been withdrawn or postponed in the United States this year, according to Dealogic, a capital markets data provider.
One way that companies have dealt with this is to limit the number of shares they sell. This strategy – a long-time practice sometimes called “chunking” – allows underwriters to place “chunks” of shares with the investors who will pay the most. It also makes it harder to find the shares to borrow them and sell them short.
The percentage of shares sold for all U.S. IPOs this year is 32 per cent, the lowest since 2001, according to Dealogic. The trend is most noticeable among U.S. tech and Web listings, which have sold just 20 per cent this year, the least since at least 1995.
“In a difficult market, if you want to maximize valuation, you create scarcity of supply, especially for social networking companies that toss off plenty of cash and can afford to raise less money,” says David Weild, chairman of Capital Markets Advisory Partners.
LinkedIn sold about 9 per cent in its IPO earlier this year, as did Pandora and Ubiquiti. That was smallest of any Web IPO since Google sold 8 per cent in 2004, until Groupon sold the fewest shares in any U.S. deal since 2000, just 6.3 per cent.
The tactic is not new. Like Google, Microsoft in its 1986 IPO also sold a small float, just 12 per cent of its shares, well below the historical average for tech groups of about 25 per cent, and 40 per cent across all U.S. groups.
But in the short term, the price of generating a good “pop” is to attract momentum traders who add volatility. Even Google, now trading at $570 a share, gyrated wildly in its first few months as a public listing.
“The float is not a major concern for guys like us who hold stocks on average for five years. I wish more people would behave the way we do, but they don’t,” says Mr. Evans of T Rowe Price.
Ipreo, a capital markets data and services group, has found that 55 per cent of IPO buyers in the first quarter after issuance are hedge funds, not institutions. That compares with 8.6 per cent across all shares.
LinkedIn tried to lessen selling pressure with a secondary offering in mid-November, before its six-month lockup ended. Many pre-IPO investors were able to sell before the lockup expiry in exchange for agreeing to an extended restriction for their remaining stakes.
Still, its sale of $714-million worth of stock, nearly double what it raised in its May IPO, spooked many traders.
Another group that sold a secondary this month before its lockup ended, Fusion-io, a “cloud” data storage group, has also fallen sharply, by 26.5 per cent this week.
“There are a lot of people who follow the trends and really don’t care much for these companies. That’s a major concern now as lockups come to an end,” says Jeff Sica, chief investment officer of SICA Wealth Management.