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Redback Rallies in Spite of Rumors

Light Reading
News Analysis
Light Reading

In a market climate that is rife with rumors purporting to explain the volatility of share prices for networking stocks, at least one rumor appears to have been quelled.

Late last week, several Wall Street sources said Redback Networks Inc.'s (Nasdaq: RBAK) precipitous price drop was related to a looming offensive from Cisco Systems Inc. (Nasdaq: CSCO). The rumor apparently held that Cisco would be lowering prices in its 6400 product, in order to better compete with Redback's Subscriber Management Systems (SMS) offerings and drive down Redback's profit margins.

But even if Cisco drops prices -- which it has not publicly announced -- Redback officials maintain it would not affect their customers. And some experts associate the recent volatile action in Redback shares with an insider selling window that closed on Friday, downplaying the price-war rumor as hearsay.

"I had heard the rumor that Cisco was cutting the pricing on the 6400, but I spoke with Cisco and they said they hadn't changed anything," said Mark Edelen, an analyst with Thomas Weisel Partners.

Edelen, as well as one other source who declined to be named, said the selling was more likely related to the Redback's insider-selling window, which closed on Friday. "With the insider window, there is typically some dirty work that goes on there sometimes, with short-sellers starting rumors," said Edelen. "This rumor seems to be unfounded."

Redback officials acknowledged they had heard the same rumor, but said they have seen no evidence of a price war, and did not expect any detrimental affect on their business due to competition with Cisco. "If Cisco admitted they will use price pressure as a metric, it is an admission of failure," said Larry Blair, vice president of marketing with Redback. "Our customers don't view this as a price/commodity game."

Cisco officials did not return phone calls.

On Friday, at least three other fund managers cited the same rumor about Redback, which indicates that it was circulating widely. Redback shares lost 15 percent of their value last week. On Monday, however, Redback stock rose 6.56 points, or 5.13 percent, to close at $134.44, after the insider selling window had closed.

-- R. Scott Raynovich, Light Reading http://www.lightreading.com

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