Investors pay close attention to what executives and board members do with their own shares in a company. The theory goes that if these insiders who know a company best are buying shares, they must have good reasons to be optimistic. And if they’re selling, they may be seeing signs of trouble way before the ordinary stock investors catch on.
Insider share sales, then, are a red flag for many investors. And for an extra warning sign, it's worth a close examination of the stock offerings that recently public technology companies arrange for their management, directors and earliest backers.
There are some intriguing anecdotal correlations between corporate insiders who dominate what’s called follow-on stock sales -- extra batches of shares offered in the first few months to the first couple of years after a company holds an initial public offering -- and subsequent market declines for that company.
In aggregate, tech company share prices don't underperform when insiders are responsible for the preponderance of shares sold in these follow-on stock offerings. But there are enough troubling cases for investors to give an extra sideways glance when the people closest to the company dominate the organized stock offerings after an IPO.
In one high-profile example, five months after GoPro went public in June 2014, CEO Nick Woodman, pre-IPO investors and other insiders sold about $797 million worth of stock in a follow-on offering. The video camera maker sold $97 million in stock at the same time to pad GoPro's cash stockpile, and everyone got a price of $75 a share.
It turned out those insiders sold just after a share price peak, and GoPro shares haven’t come within arm's reach of $75 since. On Thursday, GoPro's stock price hit its lowest ever closing price of $9.78 after the company reported tepid sales of a new line of its video cameras and predicted weak sales in coming months. Shares recovered a bit on Friday, but the value of shares sold by Woodman and the other insiders 15 months ago was equivalent to more than half of GoPro’s current stock market value.
At FireEye, executives, a founder and other insiders of the cybersecurity startup sold about $690 million worth of their shares in early 2014, about five months after the company's IPO. As of midday Friday, FireEye shares had fallen 34 percent from its IPO, to $13.13 in recent trading. The follow-on sale price of $82 was barely below the highest point FireEye shares have ever reached.
Fitbit shares have fallen 45 percent since November, when some of its executives and venture-capital investors sold 14 million shares for $406 million and the company sold 3 million shares. GrubHub insiders dominated a follow-on offering after its 2014 IPO, and the stock price has nearly fallen by half since then.
There are no indications that the insiders could have predicted their companies’ later stock price stumbles. And it's completely natural for recently public tech companies to organize stock sales for their executives and pre-IPO backers.
Tech firms tend to have large concentrations of stock held by venture capital firms that were the earliest investors, and those VCs can't hold public company shares forever. Follow-on offerings give companies a chance to let those earliest shareholders and management sell in an orderly fashion rather than risk a market panic if big stockholders cash out at once.
The correlations between insider-dominated follow-on offerings and stock declines don't hold up in aggregate. Since 2014, the median decline in shares of tech companies that held follow-on stock offerings dominated by insider sales was 34 percent from the follow-on price, according to research firm Dealogic. In cases where the tech company itself was raking in most of the money from post-IPO shares, the median decline was about the same, 35 percent.
Still, investors didn't need any more reasons to be dubious of technology IPOs, no matter whether people closest to the companies sold shares or have held on. For tech firms that went public on U.S. stock exchanges since the beginning of 2014, the median share return was negative 20 percent through Thursday, according to Bloomberg data. When insiders of new public companies rush to sell their shares, it's worth being even more skeptical than usual.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
The Dealogic data included only technology and Internet companies traded on U.S. stock exchanges. The analysis excluded tech IPOs backed by private-equity firms.
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