The recent Initial Public Offering of technology company Model N (MODN) provides investors with a short investment play.
There are several strong reasons for my near-term short thesis.
One, In September, three big-time venture capital and private equity firms that need to show good results to their investors will have their MODN shares unlocked. Accel-KKR Company LLC, Accel Partners, and Meritech Capital Partners own over 6,000,000 shares and those shares will be suddenly be unlocked and available for sale subject to normal restrictions. Investment firms are under pressure to return capital to their investors after the drought created by the great recession.
Two, the management team headed by Zach Rinat also will have its 5,000,000 shares unlocked in September. Model N insiders have owned illiquid shares for many years and now they will finally be able to sell into the public market.
Three, the stock chart on MODN appears to be under severe pressure and in a steady downtrend since early August. This slide may be partially due to the company's Q2 guidance below analysts' estimates. It is unusual and a terrible sign for a new public company to guide down so soon after an initial public offering especially after it gaps up on the first day. The company also has well capitalized competitors like Oracle (ORCL) and HealthStream, Inc. (HSTM).
Our research over the past three years and the detailed empirical analysis done by professors Daniel J. Bradley and Bradford Jordan suggest that lockup expirations are, on average. associated with significant , negative abnormal returns, but the losses are concentrated in firms with venture capital (VC) backing. For the VC-backed group, the largest losses occur for "high-tech" firms and firms with the greatest post-IPO stock price increases, the largest relative trading volume in the period surrounding expiration, and the highest quality underwriters like we have in this situation with powerhouse J.P. Morgan and Deutsche Bank.
MODN is a promising tech short before the September unlock date because of the needs of the cash hungry venture capitalists and their investors, diversification needs of the management team, the company's weak stock chart and the company's guidance below analysts' expectations.