Let's say you own a huge share of a company that the stock market values at billions of dollars. Let's say, also, that selling even a small part of your holdings will make you rich beyond imagining -- in real money, not paper stock. And let's say, finally, that it's tough for any reasonable person to believe that your company has any certainty of being worth nearly as much in the future. Should you sell?
The question is worth asking now because, even with the market for tech stocks collapsing, this is an awfully tempting time for the insiders -- the senior officers, board members and key investors -- sitting on hundreds of millions of dollars of stock in Internet companies to cash out. Some are resisting the temptation, some are getting a few cookies out of the jar, and some are dumping shares like there's no tomorrow.
On Wednesday, Priceline.com and its shareholders sold 4.5 million shares of stock in what the financial markets refer to as a "secondary offering." An initial public offering is a vehicle for a company to raise money by selling stock to the public. A secondary offering is a little more complicated. The company involved will generally raise some money by issuing new shares of stock -- of the 4.5 million shares sold in Priceline's secondary offering, 1 million were new shares issued by the company to raise $67 million in operating cash.
Often a more pressing reason for the secondary offering, however, is the opportunity for insiders to turn some of their vast stock holdings into cash. In addition to the shares sold by the company, Priceline's secondary offering included 3.5 million shares sold by current stockholders. That's not money that will be used for corporate operations -- it goes straight into the shareholders' pockets.
Richard Braddock, the CEO of Priceline, sold 202,313 shares. That's $13 million and change. Jesse Fink, Priceline's chief operating officer until the end of June, sold the same amount. Meanwhile Delta Airlines, as part of its agreement to sell tickets to Priceline, got more than 1.5 million shares for 93 cents each (it still has the right to buy 17 million more). Delta sold those on Wednesday for a profit of more than $100 million.
Notably, Jay Walker, the founder and chairman of Priceline, sold no shares, despite holding 43 million of them.
All this poses an interesting dilemma because, on the one hand, you cannot really fault Braddock, or Delta, or any of the other officers or investors for taking some of their profits. Just about any financial advisor will tell you that having all your assets tied up in one company's stock is not a good idea, no matter how much you believe in it. Even bettors at the races tend to bet on a combination of outcomes.
And yet, there is a question of perception and propriety. Even if senior officers of a company believe that it is in their financial best interest to cash out some of their winnings, they should not be cashing out at the expense of the outside investors who buy their shares. If indeed there is an Internet bubble -- and, despite the striking declines of the past few days, most observers believe there still is -- it seems less than savory for insiders to cynically dump overvalued shares.
That is why it is to Walker's credit that he has resisted the temptation to do it. Whether or not he believes that Priceline is worth its huge market cap, it is reassuring to see him acting as if it is.
Now compare Walker's behavior to that of senior officers in eBay, the online auction house.
Here are some numbers from eBay's April 12 secondary offering: EBay CEO Meg Whitman sold $49.7 million worth of eBay stock. Executive VP Jeff Skoll sold $98.4 million worth. Founder Pierre Omidyar scored nine figures in cash, selling $186.7 million of eBay stock.
Those sales were made at $164.05 a share. Since late April, the market for Internet stocks in general has been in a tailspin, and eBay, hurt by a series of outages, has been hit particularly hard. The stock now stands at just below $88 a share. The individual and institutional investors who bought Omidyar's shares alone have thus already had paper losses of more than $80 million.
Even in the vaunted New Economy, that's real money.
Arguably, it is Omidyar, not Walker, who made the rational choice. Cashing in even a small portion of his holdings assures that he will be wealthy for life, whatever happens to eBay.
But, boy, if as an investor you had the choice of putting your money with the guy who's keeping his shares in a frenetic marketplace, or the guy with the nine figure checking account, which would you be inclined to pick?