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Inside Track: Chipcom Shares Dumped Prior to IBM’s News

June 7, 1995

Chipcom Corp. insiders dumped thousands of shares in the month before disclosing on May 26 that International Business Machines Corp. was slashing purchases.

Chipcom executives first disclosed problems in a conference call with analysts on April 20, the day after posting stellar first-quarter results. The company said second-quarter revenue might fall as much as 20 percent because of a drop in orders from IBM, its biggest single customer. Chipcom shares tumbled 6.6 percent that day.

But it was more than a month later, on May 26, that Chipcom announced that the damage was deeper and longer lasting, affecting the third and fourth quarter as well. The company said IBM had too many of its networking products in inventory and would reduce orders for the remainder of the year. Chipcom’s stock tumbled more than 33 percent that day to $20 a share.

During the month between those announcements, Chipcom insiders sold around 38,000 shares from exercised options, according to documents obtained from CDA-Investnet, a Fort Lauderdale, Fla., company that monitors insider activity. Insiders unloading shares in the $32 range included John Robert Held, president and chief executive officer; vice presidents Bruce Cohen and Menachem Abraham; and Treasurer Robert Peter Badavas. Chipcom currently trades at around $21.875 on the Nasdaq Stock Market.

On Friday, the Southborough, Mass., computer-networking-products company said it is being sued in U.S. district court in Massachusetts by four shareholders for misrepresentations in recent public statements, a charge it denies and vows to fight vigorously.

The suit accuses Chipcom of ``nondisclosures concerning Chipcom’s financial condition″ and of making ``unduly positive statements about Chipcom’s relationship with IBM.″

It also accuses insiders of ``furiously selling very large blocks of their own shares of Chipcom, soon after false and misleading announcements, and, therefore, at artificially inflated prices.″

Chipcom has in the past enjoyed a lucrative relationship with IBM. But analysts say the company’s problems this year illustrate the dangers of being too dependent upon one customer, especially a fickle customer like IBM.

``IBM is a very dangerous business partner,″ says Gruntal & Co. analyst Roxanne Googin.

IBM markets and sells Chipcom-made hubs, which tie computers to a network. The two companies also jointly develop products. Chipcom, which describes the relationship as ``a strategic, world-wide marketing and development alliance,″ admits that it wants to see dependence on IBM reduced from the 36 percent or so of revenue that Big Blue represented during the first quarter this year.

Some analysts wonder how early the company knew that the problem with IBM was deeper than Chipcom first disclosed. Robertson Stephens analyst Paul Johnson said analysts had gotten wind of the trouble two weeks prior to the May 26 announcement, and had called the company to inquire how serious the problem was.

``People were sort of concerned, and the company kept getting calls,″ says Mr. Johnson. But he said Chipcom wouldn’t discuss details, insisting instead that it would have an announcement later.

Chipcom senior spokesman John Ricciardone counters that the company made the announcement as soon as it realized the gravity of the situation. The suit, he adds, was filed last week by shareholders who control ``less than 1,000″ shares out of 17.9 million Chipcom has outstanding.

Mr. Ricciardone says the information was released in ``a timely fashion.″

But an IBM spokesman was less certain. He said there were several meetings between IBM and Chipcom officials ``earlier in the year″ at which the developing problems were discussed.

``I don’t want to endorse or contradict (Chipcom’s) statement,″ he said.

Mr. Ricciardone also protests that the insider selling is ``much ado about nothing,″ and the company reminds analysts and reporters alike that its insiders are regular sellers of exercised options.

But Bob Gabele, president of CDA-Investnet, suggests that it is noteworthy that the executives sold as the price of the stock was falling. ``It doesn’t look like they were expecting the stock to rebound″ after the initial late April fall and before the more substantial fall in late May, he says.

Analysts complain that the company hasn’t been helpful and has refused to share information they consider valuable. They even complain that Chipcom has been reluctant to discuss the insider sales. ``Getting information about their business is almost impossible,″ says Gruntal’s Ms. Googin. But she gives Chipcom management high marks as managers.

Other analysts defend Chipcom, saying its main problem is having a partner like IBM that they say is notorious for being unable to accurately forecast demand.

``IBM is a multi-headed monster. I really feel that Chipcom didn’t know how bad the problem was going to be,″ says Todd Dagres, an analyst with Montgomery Securities in San Francisco.

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