The conclusion of the lockup period will allow several private equity firms and CDW directors and executives to sell their shares in the firm, likely causing at least a temporary decline in the price of CDW shares due to a sudden increase in the potential supply of common shares on the market. This may result in a short opportunity for aggressive investors.
Private Equity Shares Unlocking
Approximately 130 million shares of CDW stock will become unlocked for sale on December 23-about five times the 23.3 million shares that CDW offered in its June IPO. A pair of private equity firms hold the vast majority of these shares: Madison Dearborn accounts for 66,739,156 CDW shares and Providence Equity holds an additional 59,007,410 CDW shares.
These private equity firms remain under pressure to raise capital in order to return it to their investors as the economy recovers from the Great Recession, and will likely seek to unload at least some their shares in 2013 and 2014.
The 4,094,859 shares held by CDW executives and directors will be unlocked as well, and though those individuals certainly are not under similar pressure to sell their shares, they may choose to do so in order to diversify their portfolios or address other capital needs, as they have not been able to sell their shares since the IPO.
CDW is a Fortune 500 firm providing IT solutions that serves SMBs, large businesses, governments, and other organizations in North America. The firm offers both integrated solutions and individual products. CDW chiefly acts as a reseller, either marking up vendor partners' products purchased wholesale or including their products as elements of larger IT solutions. This practice provides CDW's vendor partners with significant market reach and a built in sales organization; CDW boasts over 250,000 current customers. The firm seeks to become a critical element of its customers' IT departments, a strategy that it pursues by maintaining a large and mobile workforce.
Though CDW has a diverse vendor base, a handful of its vendors account for the bulk of purchases that the firm makes, and a change in CDW's relationships with those vendors could pose a risk to its business. Ingram Micro (IM), Tech Data (TECD), and SYNNEX (SNX) represented 12%, 10%, and 9% of the firm's total 2012 purchases, respectively. Likewise, sales of specific firms' products account for a disproportionate amount of CDW's net sales. Sales of Apple (AAPL), Cisco (CSCO), EMC (EMC), Hewlett-Packard (HPQ), Lenovo, and Microsoft (MSFT) products made up 56% of net sales in 2012; Hewlett-Packard and Cisco products accounted for 21% and 13% of net sales in 2012.
CDW is somewhat vulnerable to the declines in public spending that seem inevitable in the current American political climate; some 10% of the firm's sales in 2012 came from federal government sources.
Aggressive investors should consider taking advantage of the expiration of the lock up period to short CDW common stock.