The SEC-imposed 25-day quiet period following the September 17 Benefitfocus, Inc. (BNFT) IPO will come to a close on Saturday, October 12, likely leading to a brief increase in the stock's price on Monday as the IPO underwriters are permitted to release positive research reports.
Given the benefits exchange SaaS firm's strong entry into the market, the firm's underwriters, including Deutsche Bank (DB), Goldman Sachs (GS), Jefferies & Co, Canaccord Genuity, Piper Jaffray (PJC), and Raymond James (RJF), will be eager to capitalize on the IPO's success by flooding the investor market with positive information.
A positive correlation between the quantity and visibility of IPO underwriters and an increase in stock price at the close of the SEC quiet period has been demonstrated empirically both through our work over the past two years and through academic studies.
The rise in price typically begins in the days leading up to the expiration of the quiet period as investors anticipate the release of research, which investors understand will be positive, since the underwriters would hardly release negative reports on a company they recently underwrote; in the case of BNFT, the price has risen steadily since October 9.
BNFT is likely to see increased prices in the near term surrounding its quiet period expiration. However, since its astronomical debut, closing at $53.55 on September 18, the stock's price has steadily fallen, likely reflecting some of the firm's weaknesses in terms of potent competition, the absence of profitability, and excessive executive compensation; BNFT closed at $38.31 on October 9.
Investors who choose to purchase BNFT for near-term benefits related to quiet period expiration should keep a close watch on the stock's price, as it may quickly dip again when the quiet period afterglow wears off. BNFT has no plans to provide its investors with any dividends.
Benefitfocus is certainly a leader in the field of benefits exchange software platforms, but it is not without competition, and better-capitalized firms with access to superior resources have taken recent interest in the area. Of particular concern are Oracle (ORCL) and SAP AG (SAP).
The upcoming implementation of the Obama administration's Patient Protection and Affordable Care Act is also worrisome for those considering BNFT. The massive shift in the nature of American benefits may lead to a difficult transition for BNFT, and will surely lead to market uncertainty surrounding companies related to benefits management. Moreover, the transition may provide better-capitalized competitors with the opportunity to develop alternative services better suited to the new system.
Executive overcompensation is a serious concern for potential BNFT investors. In 2012, CEO Shawn A. Jenkins received compensation of $880,993 while CFO Milton Alpern received compensation of $1,081,799, even though the firm posted losses of $14,700,000 for the year. The firm had continued to lose money in 2013 up through its IPO; it is not yet clear if the successful IPO will allow BNFT to attain profitability. That said, the leadership team does have significant experience, and much of the team has stayed with the firm since its inception.
Additional disclosure: This article is neither a recommendation to buy or sell shares, and investors should always do their own research.