September 1, 2004

Google's stock has slipped over the past few days, and it has something to do with the expiry of the "stock lock-up" period.

Company ``lock-up'' rules have prevented employees from selling shares since the initial public offering two weeks ago. But a select group of insiders can sell for the first time Friday -- which means about 4.5 million of extra Google shares could come pouring into the market.

That's enough to give some public investors the shakes. These investors are selling their Google shares beforehand, fearing there won't be enough buyers to absorb the extra supply Friday.

``I was worried about the lock-up, dumped everything,'' said Mark Pincus, chief executive of San Francisco's Tribe Networks and an investor who sold 3,300 shares last week -- just as the stock peaked at slightly over $108 before beginning a steady decline to close at $102.37 Tuesday.

He wants to buy it all back at a much lower price after Friday, saying he'll be fishing for a price around $95.

``I hate to be a day trader, but it's something I couldn't sit and watch. I wanted to get out ahead of it,'' he said. Pincus pocketed profits on the order of ``tens of thousands'' of dollars, he said.

This is the beginning of what could be a tumultuous ride for Google shares over the next year, analysts say. It's just the first of five ``unlockings'' of insider shares, with others staggered at three months, four months, five months and six months after the IPO.

Any way you look at it, it's a head game, suggests Scott Kessler, analyst at Standard & Poor's Equity Research Services.

On one hand, only 2 percent of Google's total shares will be unlocked. And employees may choose not to sell. If so, it could be a sign of optimism for Google's future -- and a sign for investors to think about buying. (Then again, they might be holding because the holiday season's weak demand means they may not get the best price.)

Looked at another way, only about 8 percent of Google's total shares began trading publicly at the IPO. And so the extra 2 percent Friday is actually a big number -- representing an entire quarter of the publicly trading shares.

``There's essentially a cascade of shares becoming available Friday,'' says Kessler. ``It is one of the more significant risks out there.''

Also, this week is relatively slow for financial news, and so multiple reports about the lockup expiry could be more likely to grab the attention of investors and cause nervousness. Lock-up expirations ``are almost always negative catalysts,'' said Mark Mahaney, analyst at American Technology Research.

Google's lock-up expiry is garnering even greater attention because it is so unusual. The overwhelming majority of newly public companies keep their insiders locked up for a standard 180 days as a way to avoid volatility. Google's earlier-than-usual schedule has concerned some analysts, who say it brings more focus on insider selling -- potentially unnerving investors.

Also, lock-up expiries tend to jolt a stock more when there's market uncertainty, says Dale A. Oesterle, a securities professor at Ohio State University. And in Google's case, there's plenty of it: Investors are still mulling over quirks such as a dual-class share system, the founders' declaration that they plan to give money to diverse causes, and Google's youth. Also, the more employees get their chance to sell shares, the more millionaires Google has running around its office.

``Google has 2,000 employees and half of them are millionaires awash with cash,'' he said. ``I have serious doubt that the firm will be able to run things like it used to . . . There's a lot of risk in this stock price.''

Still, ATR's Mahaney argues Google has found a comfortable trading range in the low $100s. Google is fairly priced at $110, he says, but the lock-up might keep the stock trading slightly lower -- around where it is now. In other words, it might already be too late to avoid the expiry's effects.

Source: Mercury News.com

        

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