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Also, check out: "Lou's Lair vs. Bill's Loft", "IBM's Best Years Are 3-4 Decades Behind," ICC: More Armonk "Fudge," Armonk's "Fudge Factory," "Now IBM Is Even 'Officially' Spineless", "Where Armonk Meets Wall Street, Greed Breeds Incest", "Some Insiders Cashed in on IBM Stock Buybacks", "Louis XIX of Armonk", "Wag the Big Blue Dog", "the new blue"

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An Update to IBM Insiders' Trading

Gerstner: Best Years Are Behind

Gerstner Seems to Agree with Us; Dumps 328,000 Shares Worth $40.9M

PHOENIX, Aug. 10 - In our last Annex Bulletin (99-26, 7/28/99), as in a number of earlier editions, we said that IBM's best years are behind it. Well, IBM's chairman and CEO seems to agree with us. Lou Gerstner dumped 328,000 of his IBM shares for the total proceeds of $40.9 million.

louis-99.jpg (51086 bytes)Gerstner sold 278,000 shares on Friday, Aug. 6 at $124.80 each, and another 50,000 Monday, Aug. 9 at $124.04. His stock option price was a mere $11.97. Which means that his pretax gain was about $37 million.

Gerstner had earlier registered to sell 400,000 of his shares, according to a Form 144 released Monday by the Securities and Exchange Commission, Federal Filings Business News reported. The filing indicates Gerstner had intended to sell the shares on Aug. 6. Salomon Smith Barney was listed as the broker for the transaction. Gerstner still owns 860,000 after the transactions, and owns additional options for over seven million IBM shares.

By the way, Salomon Smith Barney has an "aggressive buy" recommendation for the IBM stock (A tit-for-tat? You scratch my back, I'll scratch yours?). According to its definition of Salomon's "1M" rating for IBM, the stock "offers significant investment potential relative to peer group, in terms of net asset value (NAV) and market price, based on portfolio fundamentals and current valuation."

What it didn't say, however, is that the rating was for suckers. Just ask Gerstner.

IBM stock closed today at $1193/16, down more than five points since Gerstner started his selling spree. The Big Blue shares are off by more than 14% since reaching their all-time high of $1393/16 in late July.

Armonk provided a stock explanation for Gerstner's sale of the IBM stock - that he had sold his Big Blue shares to "diversify his financial holdings."

Funny thing, this sudden urge to "diversify." Ever wondered why such euphemisms are never used for growth stocks?

The timing of Gerstner's sales is also curious. Because on Friday morning, the day he dumped 278,000 of his shares, the Wall Street Journal published a story about IBM being investigated by Inland Revenue (the "British IRS") for possible tax evasion as the top front page news article.

As you saw in the Is IBM Cheating on Taxes?" -section of the Annex Bulletin 99-17 (5/28/99), we first signaled our concern about IBM's unusually low tax rates over two years ago - in July 1997. And have since estimated that IBM tax liability may be in excess of $1 billion even before any penalties are assessed by tax authorities.

The Bloomberg wire also carried a report about this on Friday.

So what was the stockmarket's reaction to such "shocking" news to most investors? A shrug. Further proving the point that the market has become little more than a glorified casino with minimal relationship to business issues of the companies it trades, IBM rose nearly two points this morning after the story broke.

But Gerstner knew better. He used the opportunity to start to bail out before the long arm of the taxman cometh and taketh away the illusion of prosperity he had built up, using over $28 billion of his shareholders' money (for stock buybacks).

Happy bargain hunting!

Bob Djurdjevic


Volume XV, No. 99-28
August 10, 1999

Editor: Bob Djurdjevic
Published by Annex Research

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