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Also, check out: ICC: More Armonk "Fudge," Armonk's
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IBM CORPORATE AFFAIRS

Analysis of IBM Insider Trades in the Second Quarter 1997

Executive Suite: How Sweet!

IBM Brass Cash in on Own Hype, Record Stock Prices; Thompson, Gerstner Lead the Way

PHOENIX, July 24, 1997 - How sweet is the IBM executive suite these days?  Very!  Seven insiders sold about $28 million worth of IBM stock in the second quarter for an estimated pretax profit of about $13 million.  This followed a $33 million selling spree in the previous two quarters which yielded an estimated pretax profit of almost $15 million (see Annex Bulletin 97-22, 5/27/97).

The IBM chairman, Lou Gerstner, joined the "Big Blue Seven" in the second quarter.  He sold some $4.8 million-worth of IBM's stock in mid-June by exercising stock options at about 27 cents to the dollar compared to the open market price of the IBM stock, according to the Dow Jones Corporate Watch Report (DJCWR), which, in turn, is based on the SEC filings.  Averaging the cost of the latest and his earlier stock option acquisitions, we estimate Gerstner's pretax profit to be about $3.5 million on this transaction.  

Not a bad day at the office for the Big Blue's chairman, especially considering that all members of the IBM Board's Executive Compensation Committee have been appointed by Gerstner himself (C.F. Knight in 1993, A. Trotman and C.M. Vest in 1994).

But Gerstner was not the top profiteer among the members of the Armonk executive suite in the second.  That dubious "honor" went to IBM's "software czar," John M. Thompson.  He "broke the bank" as the IBM stock set its first all-time high on May 14, and has gone on to break that record several times since then (see the chart of page 4).  Thompson sold over $14 million-worth of IBM stock between May 1 and May 21, for an estimated pretax profit of about $5.6 million.

No wonder this IBM executive was so touchy when we discussed his insider trades with him on a couple of occasions in late May.  Unbeknownst to us at the time, he was evidently adding to his 1997 trading profits just as we were investigating his gains in the fourth quarter of 1996.  Here is an excerpt from the Annex Bulletin 97-22 (5/27/97):

To his discredit, however, two days later, when we persisted with double- and triple-checking all the figures and claims, Thompson became quite testy.  "I think you're out to embarrass some officers of the company," he said.  "And I am not going to help you do that."

Well, if holding up the mirror to what "some officers of the company" have done is embarrassing to them, shouldn't the officers blame their own actions rather than try to smash the mirror? 

Evidently not... at least not at IBM.

In our previous analysis of the IBM insiders' trading, Thompson had won only a "silver" medal, after Ned Lautenbach, IBM's worldwide sales and marketing boss who got the "gold" as the Armonk executive who profited the most from insider trading during the period October 1, 1996 through April1 1, 1997 (see Annex Bulletin 97-22, 5/27/97).  In the latest quarter, however, Lautenbach was only a minor player, as was Nick Donofrio, the former head of IBM server divisions, and now the company's top technology officer.

Besides the IBM chairman, two other executives joined the group of IBM insiders which we dubbed the "Big Blue Seven" in our last report (yes, there were again seven insiders who traded the IBM stock in the second quarter; seven must be a lucky number! J).  They were John Hickey, a vice president and the Board secretary, and Dennie Welsh, a senior vice president in charge of IBM Global Services.  They sold about $2.5 million- and $1.6 million-worth of stock respectively, for pretax gains of about $1.2 and $1.1 million respectively.

Thomas Bouchard, IBM's top human resources executive, reportedly sold about $3.4 million-worth of IBM stock in the second quarter at an estimated pretax profit of about $1.5 million.  He got the "bronze" for the quarter among the Armonk brass.

SUMMARY

Our overall conclusion about the second quarter IBM insiders' trades is not much different than that we had reached in our earlier report. 

First, such insider trading activities are unprecedented in the recent history of IBM, and would have been frowned upon by the Big Blue's leaders who had preceded Gerstner at the helm of the world's largest computer company.

Second, if what IBM insiders have done is legal, and they claim it is, then perhaps we need new legislation to prevent such self-dealing abuses.

Let us revisit the arguments:

 

How Some Insiders Took

Advantage of IBM's Stock Hype

Following Gerstner's and his IBM lieutenants' pitch to Wall Street analysts in early September (1996), investors suddenly began "rediscovering" the Big Blue as an exciting stock to own.  One after another, Wall Street analysts started raising their P/E (price/earnings) ratios, even though there was no corresponding increase in earnings.  This, plus the multi-billion IBM stock buybacks ($1.9 billion in the fourth quarter of 1996, $2.0 billion during the first quarter 1997 and $1.6 billion in the second quarter), gave the IBM stock a strong upward push.  And the "Big Blue Seven" insiders took advantage of the opportunity to cash in on the Wall Street's gullibility. 

The fact that all this was perfectly legal, as Donofrio, for example, pointed out, only illustrates how imperfect our financial laws and regulations are.  If this was within the rules, than we need some new rules; the rules which would protect the ordinary investors from abuses of their trust in our financial system.  For, there were SUBSTANTIAL real or perceived conflicts of interest at work in these transactions. 

For example, IBM, a company run by these insiders, was buying back its stock by the billions at the time the insiders were selling their stock options.  So it is at least theoretically conceivable that some the insiders' shares were sold to IBM. 

That's like a homeowner "selling" himself portions of his property at inflated prices so as to allure other arms-length bidders to up the ante.  And then bailing out when the price is high enough.

And that's "legal" on Wall Street?  That's legal in America?  Frankly, to us this looks like a scheme which might even do Charles Keating proud.

The stock buybacks are the second example of conflict of interest in IBM's case.  After all, besides being a tremendous waste of capital, the stock buybacks are a scam on a par with a homeowner bidding against prospective buyers to raise the price of his/her property.  Yet Wall Street applauded the move by pushing the IBM stock to its all-time high. 

Guess there is no such thing as "conflict of interest" in a world ruled by Greed?

Consequently, how can Wall Street claim any more credibility than Las Vegas, if it sanctions such rip-offs of "ordinary" investors by corporate insiders?

Worse, how can Washington justify being the "government of the People for the People..." when it lets Wall Street take advantage of the People in such an odious way?

 

Indeed, how?

Happy bargain hunting!

Bob Djurdjevic








Volume XIII, No. 97-31
July 24, 1997

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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