CHICAGO – Divine InterVentures, the Chicago-based incubator that has fallen on hard times since its July 18 initial public offering, faced a new test of confidence on Jan. 7 as open trading officially began on 22.41 million shares freed up following expiration of the firm’s 180-day lockup period.
Interestingly, this lockup expiration will be Divine’s third. The company had previously weathered a 60-day “family and friends” lockup and a 90-day lockup. The expiration of those two lock-ups permitted the release of nearly 4.74 million shares and 27.13 million shares, respectively. This will not be the company’s last lockup period either, as another 38.34 million shares and 29.29 million shares will become freely tradable at the end of 270-day and 360-day lockup periods, respectively.
When the final lockup expires this July, more than 136.19 million Divine shares will be freely tradable.
But by no means does this mean that the shares will be circulating. In what Divine executives must take as an encouraging sign, shareholders did not jettison shares following the expiration of either of the two previous lockups.
After finishing a hair above its $9 offer price on Aug. 31, Divine saw its shares gradually slide to $5.81 the day after the 60-day lockup expiration on Sept.18. By the time the next lockup rolled around on Oct. 18, the stock was barely above $3 per share.
Following the most recent lockup expiration, Divine’s dipped to $1.06. At press time, the shares were trading around $1.30.
A Bit Out Of The Ordinary
While staggered lockups are not unheard of, they are also not the norm.
“Presumably, all such arrangements were introduced by underwriters as a means of reducing price volatility at or around the date of lockup expiration,” said Paul Elliot, an analyst with First Call. “Of course, the very notion that staggered lockups were introduced to smooth volatility is tenuous. It seems every bit as likely that staggered lockups were developed merely to serve the needs of venture capitalists looking to get out as soon as possible and at the best possible price.”
In Divine’s case, however, Elliot added that there seems to be a genuine desire on the part of the company to give principal shareholders the benefit of the doubt. He said that citing while some shareholders were allowed to exit early, insiders went along with additional lockup periods that went past the standard 180-day lockup.
Divine’s principal shareholders include its 45 executive officers and directors who, following a series of private placements executed concurrently with the IPO, own 27,768,207 shares, or 24.4%, of Divine’s stock. Of the executive directors, Divine’s Chief Executive Officer Andrew Filipowski owns the most with 7,784,163 shares.
In those private placements, Divine sold an aggregate of 7.26 million Class A shares and 23.29 million Class C shares to 360networks Inc., Aon Corp., CMGI Inc., Compaq Computer Corp., Hewlett Packard Co., Level 3 Communications, MarchFirst Inc., Microsoft Corp., and BancBoston Capital Inc. Those companies are subject to 12-month lockup agreements. These private placements raised $258.9 million, while the IPO raised $109.5 million.
The other principal shareholder is Dell Computer Corp. with 16,766,664 shares (14.8%). Dell was subject to the 180-day lockup.
Divine is hoping that these investors don’t go the way of many of their corporate peers, which have recently seen their own venture programs ensconced in discouraging economic doldrums.
For example, Compaq, in its December profit warning, included a $1 billion write-off from investments in companies with plummeting values. One of those companies is CMGI, the incubator whose stock has tumbled to just above $5 per share from a 52-week-high of $163.50. Also, in November, Hewlett-Packard and Gateway Inc. wrote off $48 million and $200 million of their VC programs.
Divine has taken steps over the last several months that it hopes will strengthen its fundamentals and, in turn, convince shareholders to stay put. The company laid off 18 of its 41 employees in November, aiming to slow its burn rate, a point on which the company has been frequently berated.
The company is also now leaning less toward new investments and more toward consolidating its companies and streamlining its portfolio to change with the times, including a bigger emphasis on Internet infrastructure companies.
According to a quarterly report filed with the Securities & Exchange Commission on Nov. 14, Divine more than doubled it total assets to $677.8 million through the first nine months of 2000, from $238.9 million during the same period the year before. For the nine months ended Sept. 30, the company posted slightly more than $31 million in revenue and a net loss of $212.8 million. Analysts estimate that, with a cash flow currently of $270 million and a $36 million annual burn rate, Divine has enough resources to take it through at least the fourth quarter of 2002.
The new frugality which has gripped Divine, not to mention the venture capital world in general, could, however, strike fiercely at the companies it has funded.
“Many of Divine’s portfolio companies could potentially see down funding rounds where follow-on valuations are completed at lower levels or where M&A transactions are consumed at significantly lower than purchase price valuations,” said a Nov. 10 First Call report from Bear Stearns. – O.S.