Google’s Lock-Up Ends Monday

After a successful initial public offering, Google faces something of a challenge on Monday morning. The lock-up period ends, and many employees and others will get a chance to cash in their stock, becoming multi-millionaires in some cases. The question is whether this will be a Valentine’s Day gift to investors, a buying opportunity, or simply a Valentine’s Day Massacre.

Lock-ups are pretty standard on Wall Street. Shareholders of record before the IPO are prevented from selling their stock for a certain period time. This prevents insiders from undermining the initial price, and it ensures that personnel who have made the company successful stick around a while. When the time limit expires, they can sell their shares just like anybody else, and a great many do just that.

In Google’s case, 176 million common shares will be freed on Monday. That’s about 65% of all the outstanding shares, and the current float of 127.7 million will more than double. Even at Harvard Business School and the University of Chicago, economists teach that an increase in supply of a good (in this case common stock in Google) without a compensating increase in demand will result in a lower market price. So, Google will drop in price on Monday – right?

Probably, but not necessarily. After all, it is no secret that there’s a supply increase coming on Monday morning. Many investors and traders have already factored that into their bids and asks. It is difficult to say just how much of a discount the market has priced into the stock already.

Moreover, those who own the soon-to-be unlocked stock may not throw all of it onto the market at once; so just how much greater the supply will be is hard to gauge. And that may be offset by heightened demand brought on by the end of the lockup itself. Once this final IPO-related consideration vanishes, Google will trade again on its business factors, not its capital structure considerations.

The Kensington Review uses Google’s search on its pages – the code is provided free of charge. In addition, the ads that appear on these pages come from Google’s Adsense service, and which generate revenues. None of which changes the fact that this event is likely to be a textbook case in what happens when a lock-up ends.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

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