IBM Punished, Then Exonerated
IBM's stock took a big hit on Thursday (April 11), as the morning's press bristled with reports that the SEC had been investigating IBM's accounting since February 15, 2002.
But later in the day, the SEC announced that it had closed the inquiry without action.
"Regarding the reports of a preliminary inquiry by the SEC into IBM, the SEC staff opened the inquiry and closed it without action shortly thereafter," an SEC spokesman confirmed this morning.
In early morning trading on Friday, IBM shares recovered to rise $3.51 (4.17%) to $87.70.
In February, an article in the New York Times questioned whether IBM had adequately disclosed its sale of one of its transceiver units to JDS Uniphase prior to IBM's fourth-quarter earnings announcement in January (see JDSU's Bid for the Enterprise and JDSU Closes IBM Deal). The implication was that IBM had tried to mislead investors by using the sale to fortify its position without detailing what it had done.
IBM did not file information about the sale of the Rochester, Minn., unit until March, and its filings do not mention JDSU by name. Instead, IBM's annual report mentions only "$280 million of pre-tax income from the transfer of the company's optical transceiver intellectual property."
In contrast to this cryptic classification, JDSU's 10-Q form filed for the same period clearly lists the transaction as an acquisition from IBM for which JDSU paid $338.6 million. Furthermore, it itemizes what was included in the price: tangible net assets such as inventory and fixed assets, as well as intangibles such as technology and contracts. About $216.5 million of the total cost is listed as goodwill.
IBM refused to comment on the reports. "We don't comment on rumors, and we don't comment on our relationships with government bodies. That's it," said spokeswoman Carol Makovich.
During the day, the company's stock fell more than 5 percent. After the market closed, the SEC made its statement, apparently via phone to various media outlets.
Sources say the SEC took the unusual action because it felt the report that sparked yesterday's media onslaught, an item in a newsletter issued by research company SEC Insight Inc., was based on a misunderstanding of some correspondence the SEC issued in February.
The December sale of the Rochester unit was an attempt by IBM to jettison nonstrategic elements of its microelectronics unit and to focus on network processors, including those for broadband IP devices. Indeed, IBM has followed through in this direction with recent announcements (see IBM Intros Network Processor), and spokespeople say IBM sees ongoing development in the Sonet area as strategic.
On Monday, the company released a statement that its first-quarter 2002 revenues, due April 17, would fall between $18.4 billion and $18.6 billion, considerably lower than investors initially expected. Additionally, Big Blue says it's preparing for a 35 percent revenue decline in its Technology Group, which includes microelectronics, storage, and networking hardware.
— Mary Jander, Senior Editor, Light Reading