Have Mergers Sparked Insider Trading?

Internet merger mania is accelerating at a speed most analysts would have deemed impossible a few short months ago. The money being pumped into the mergers of high-tech companies has soared to $545 billion (US$) during the first six months of 1999 — easily surpassing last year’s record of $488 billion for the entire 12 months.

This hyperactivity, some experts say, is directly responsible for driving the prices of many e-commerce stocks through the stratosphere, prompting many top insiders to sell huge blocks of their shares — cashing in while the getting is good. Internet, communication and media companies entered 2,900 deals as of June, according to Fort Lee, New Jersey-based Broadview Associates LLC.

Let’s Make a Deal

Young and well-established companies alike are spending billions trying to become the dominant players on a playing field that seems to be consolidating daily.

For instance, recent deals by Internet portal Yahoo! include its acquisition in July of Web media programmer Broadcast.com, which is valued at about $5 billion in stock. In May, the giant portal acquired Webservice GeoCities and software developer Encompass Inc. Even relative newcomers like Healtheon Corp., started in 1996 by Jim Clark, founder of Netscape and Silicon Graphics, are pulling out the stops to achieve critical mass. Since going public in February, the Santa Clara, California company that helps the healthcare industry to pay claims via the Internet, has announced three acquisitions — including a $7.9 billion merger with WebMD Inc.

Cashing In

Analysts say that the flurry of activity on Wall Street spurred by mergers and rumors of mergers has in many cases pushed some companies’ stocks to all time highs. The consensus among many of the same experts is that this could be the major factor behind many of those companies’ top executives recently selling off some of their holdings. Nonetheless, in some cases, insiders who have recently sold off some of their stock, have done so at prices below their highs for the year.

A study by First Call/Thomson Financial reported the following top ranking inside sellers of their companies’ stock in 1999:

Bill Gates, chairman of Microsoft Corp., sold off 30 million shares of his stock for $2.5 billion (US$). Philip Anshultz, founder of Quest Communication International, cashed in 33 million shares for a grand total of $1.5 billion. Michael Dell, CEO of Dell Computer Corp., collected $681 million for selling off 17 million of the shares he owns. Naveen Jain, founder of Infospace.com, traded 4 million shares of his holdings for $203 million. When Will the Bubble Burst?

While no one has a crystal ball, many analysts say that merger mania will continue for at least the next five years, creating unprecedented wealth throughout the world. But this kind of optimism has been shattered before. Just before the great stock collapse of 1929, Wall Street was filled with paper millionaires.

Hopefully, history won’t repeat itself anytime soon.

What do you think? Let’s talk about it.