IBM’S BID FOR LOTUS : Pre-Bid Trading Questioned : Regulators Note Friday Activity of Lotus Shares
On the last trading day before a takeover attempt nearly doubled the stock price of Lotus Development Corp., stock and options of the company traded heavily, a fact that has caughtthe attention of regulators on the prowl for possible cheating.
Lotus shares rocketed $28.94 to close at $61.44 on the Nasdaq Stock Market on Monday in heavy trading after International Business Machines Corp. made a surprise $60-a-share bid for the software company. The deal would be the largest software takeover ever.
Although Lotus officials expressed surprise at the bid, Friday’s trading activity in the company’s stock and options are leading stock market officials to examine whether someone knew about the plan and took the opportunity to profit.
On Friday, Lotus was the second-most heavily traded issue on Nasdaq, up $3.25 at $32.50 a share. Volume was 3.8 million shares, more than double its average daily trading of 1.6 million shares. There was no specific company announcement or research report Friday to account for the heavy trading, said Chris Galvin, technology analyst for Hambrecht & Quist, a San Francisco investment firm.
On the American Stock Exchange, a Lotus call option contract was one of the most actively traded issues that day. A call option gives the investor the right to buy shares at a particular price within a specified period; the inexpensive price of options give investors the opportunity to make enormous profits when share prices rise sharply.
It’s not unusual for Lotus to be an actively traded issue on Nasdaq, and industry analysts say technology stocks in general have been volatile.
Frank Michnoff, technology analyst for Donaldson Lufkin & Jenrette Securities Corp. in New York, said he thought Friday’s trading was driven by analysts’ speculation of Lotus’ cost-cutting plans, which would boost earnings. But Michnoff said he couldn’t recall a specific analyst report or announcement on that issue Friday.
The heavy trading may not have been a coincidence: Insider trading is on the rise. The Securities and Exchange Commission last year brought a record 45 cases alleging that individuals illegally bought stock with confidential information about major upcoming events such as tender offers and mergers.
The potential for such enormous profits from Friday’s trading in Lotus had alarm bells ringing loudly at Nasdaq and the American Stock Exchange.
Someone who spent $3,250 Friday for 100 shares of Lotus would have found the investment worth $6,144 by the end of the day Monday--a profit of $2,894.
Lynn Nellius, director of Nasdaq’s market surveillance, said he couldn’t say whether the Lotus activity was under investigation by the market’s analysts or if they had referred the case to the SEC, the main government policing agency for the financial markets.
But Nellius added, “It’s the type of activity that would get attention of our systems and analysts.”
American Stock Exchange spokeswoman Arda Nazerian said it is also standard practice for that exchange to review options trading any time there is heavy trading in the underlying stock.
At the Amex, the June $35 call option closed up 97 cents Friday at $1.97 on active volume of 2,028 contracts--463% higher than the contract’s average volume in May.
Friday’s volume for the June $40 call option volume was up 506% from May’s average, and the June $30 call option volume was up 2,305% over the May average.
“The chances of turning over the information to the SEC are very good,” said an exchange source, who spoke on condition of anonymity.
Lotus declined to comment about the Friday trading activity. Telephone messages placed with IBM late Monday were not immediately returned.
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A Big Deal
IBM’s $3.3-billion takeover bid for Lotus comes amid finacial recovery. After three years of heavy losses, IBM stock has bounced back, climbing steadily since the fourth-quarter of 1993. Monday, Lotus shares skyrocketed on the news of the IBM offer, closing at $61.4 on the Nasdaq, up $28.94.
IBM quarterly highs and Monday’s close:
Monday’s close: $91.25
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Lotus quarterly highs and Monday’s close:
Monday’s close: $61.44
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IBM earnings, in billions:
1994: $3.0
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Lotus earnings, in millions:
1994: -$20.9
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Sources: TradeLine, Bloomberg Business News, wire reports
Researched by JENNIFER OLDHAM / Los Angeles Times
