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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
