The recent collapse of highflying technology and health-care stocks has stung buyers who paid steep prices for shares sold by the companies earlier this year in a surge of follow-on offerings

Secondary Sales Squeeze Investors

Slide in Technology, Health-Care Stocks Has Cooled Demand for Follow-On Sales


June 2, 2014 7:23 p.m. ET

A gold rush in public-company stock offerings has failed to pan out for many investors.

The recent collapse of highflying technology and health-care stocks has stung buyers who paid steep prices for shares sold by the companies earlier this year in a surge of deals known as follow-on offerings.


That has cooled demand for the sales, meaning companies won’t see the same strong pricing that prevailed earlier in the year. At the same time, the stock prices of companies that completed offerings before the rout may come under pressure as investors use any rebounds to sell and reduce their losses.

When it comes to deals involving these once top-performing stocks, “Every purchase has been a bad purchase and every sale has been too small,” said Andrew Cupps, chief investment officer of Cupps Capital Management LLC.

His Chicago-based firm, which oversees $1.4 billion and bought tech-company shares in follow-on offerings earlier this year, has reduced some of those investments. Mr. Cupps declined to name the stocks he bought or sold.

Starting in late February, shares of fast-growing, richly valued technology and biotechnology companies tumbled. With no apparent catalyst to point to, traders speculated these stocks’ rapid gains in the preceding months had simply taken them too far too fast. The selloff stung some money managers and weighed on demand for initial public offerings. One week in mid-April saw eight IPOs price below expectations, the most for any week since 2004.

Shares of FireEye Inc., FEYE -3.35% a cybersecurity company, have plunged 61% since the company and insiders sold 14 million of shares for $82 apiece on March 6. Advertising-technology company Rocket Fuel Inc. FUEL -3.20% ‘s stock is down 60% since a $305 million offering In January. Data-analysis software firmSplunk Inc. SPLK +0.26% ‘s stock has tumbled 48% since a $559 million offering the same month.

Overall, shares sold by U.S.-listed technology companies or their insiders in these deals this year fell an average 7% from where these deals priced through Friday, according to Dealogic. Health-care companies’ shares have lost an average 13% since the offerings. Meanwhile, the S&P 500 rose 4.1% year-to-date through Friday.

The first three months of 2014 saw 224 follow-on offerings of U.S.-listed companies’ shares, the most for any quarter since the second quarter of 1998, according to Dealogic. Those first-quarter sales, also known as secondaries, raised $43 billion.

While new deals continue to get done, bankers say investors have been much more cautious about the prices they are willing to pay. Since the start of 2012, follow-on sales have priced at an average 7.3% discount to the stock’s price when sellers filed for the offering. But during the frenzy, investors were willing to buy shares in some hot names at little or no discount. FireEye’s sale priced at a so-called file-to-offer premium of 12%.

No longer. Follow-on offerings in April priced an average 13% below the stock’s price when sellers filed to do them, the largest such discount in any month since at least 2009, according to Dealogic. May’s offerings had an average 9.5% discount.

“The more a name is down from where the deal priced, the more of an orphan it becomes,” said Jim O’Donnell, chief investment officer at San Francisco investment firm Forward Management, which occasionally buys shares in secondary offerings. “It’s hard to find a bottom for some of this stuff.”

Many secondary deals padded the coffers of companies looking to raise money and grow their businesses. But in some cases they also saw insiders cash out.

Norwest Venture Partners and FireEye founder Ashar Aziz sold roughly 3 million shares in FireEye’s March offering. Mr. Aziz alone sold $86 million of stock in the deal.

In a March offering by business-communications software firm RingCentral Inc.RNG -1.89% that raised $172 million, early investors including venture-capital firm DAG Ventures sold significantly more shares than the company itself. The deal was done at $21.50 and the stock is now at $11.94.

A FireEye spokesman noted the company’s shares rose in the weeks leading up to its offering, despite a lack of material news releases by the company. “We can suffer and we can gain from the market macrodynamics that we can’t control,” he said. “The follow-on was done so we could raise money for our expansion.”

Splunk CFO Dave Conte said the company’s intent was to “bolster our balance sheet in order to enhance our product portfolio,” but didn’t comment on the timing of the deal.

Mr. Aziz couldn’t be reached. Representatives of Rocket Fuel, RingCentral, Norwest and DAG Ventures didn’t respond to requests for comment.

Until recently, stock investors were rewarded for taking the other side of the follow-on trade.

In every month from September 2013 through February 2014, follow-on offerings produced an average one-month return of at least 5%. In the same months, the S&P 500 produced average monthly gains of 2.2%. But shares of companies doing these deals in March and April were an average 6.4% and 4.8% lower a month later, according to Dealogic.

“You never know when these things are going to reverse until they do,” said Jim Landreth, a portfolio manager at 300 North Capital LLC, which oversees $500 million in Pasadena, Calif.

Mr. Landreth has been selling technology stocks this year, while buying shares in what he says are more reasonably valued businesses poised to benefit from an accelerating economy. He didn’t buy in any of the recent offerings.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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