Date: December 20, 1999
Section:
Location:
Cranbury
Title: The Story Behind the Shooting
Star
Author: By Chris Dupin
Deck: Officials at Ariel
finally speak out about their business and its wild ride
on Wall Street.
Story:
On the Saturday after
Thanksgiving, even though he was getting married later
in the day, John Loprete was at his office. As vice
president of finance for Ariel, he was finishing
paperwork on thousands of stock options that had been
exercised by company employees the prior day. Ariel is a
small business with 90 employees, 75 of whom work at its
headquarters in Cranbury. Loprete is the person who has
to process employee options. ãHe was here the morning of
his wedding doing this. I had to call him and kick him
out of the building to go get married,à recalls Dennis
Schneider, senior vice president at Ariel.
At the
end of 1998, Ariel had about 2.7 million stock options
outstanding, and while senior management did not change
their holdings, many other workers did. ãLots of
employees became happier as a result of their ownership
in the company,à says Schneider.
On Tuesday,
November 22, the companyås stock closed at $3.56. On
Wednesday, the company put out a press release about how
a new modem card it has developed for Internet service
providers (ISPs) had received certifications from
various regulatory bodies. The card, which Ariel hopes
to begin delivering in the first quarter of next year,
represents a new direction for the company. Schneider
says certification is an important milestone for a small
company that wants to convince potential buyers that its
product is not just hype or ãvaporware.à The news was
featured in reports on CNBC, Ariel shares caught the
fancy of investors and skyrocketed to a high of $13.31,
closing at $10.75.
But that was just the start of
the buffeting Arielås stock was to take. The market was
closed Thanksgiving, but Friday the stock shot to a high
of $57 before closing at $37. On Friday, the company
issued a statement saying it had ãno pending
announcements that explain this level of activity.à
Schneider said the statement went out without prompting
from Nasdaq, where its stock is listed, though he says
it is ãsafe to assumeà his company subsequently talked
to the exchange. ãWe wanted people to know there was not
some announcement about to hit the street that would
justify all of that--if anything could justify all of
that.à The following week Arielås stock fell back into
the low teens where it has traded since, sometimes
falling into single digits. It closed last Friday at
$9.
To market and chat-room watchers like Floyd
Schneider, publisher of the The Truthseeker Report
in Newton, the run-up had the look of a classic ãpump
and dumpà where investors bid up a stock and then short
it. He claims several news organizations incorrectly
reported Arielås product was ãrelated to wireless
communications, which appeared to stimulate momentum
buying.à And a mention in the release that Arielås
product could run on the Linux operating system as well
as Windows NT may have fueled the mania.
ãPreholiday/preweekend trading sessions are notorious
for market manipulations,à he says, citing a company
called Books-a-Million, whose shares soared from $4 to
$48 around Thanksgiving 1998.
Charles Robins, a
managing director at Pennsylvania Merchants Group in
Philadelphia, which helped arrange secondary financing
for Ariel several years ago, notes there are ãa lot
Internet day traders out there who listen to, for
example, CNBC, or listen to chat boards. There is almost
an instant magnification effect going on as people pick
up on various snapshot, soundbite news points and then
react and each one feeds on the other, and I think that
is what happened to Ariel,à he explains. CNBC
commentators, he adds, have been ãelevated to the same
kind of microscrutiny that Alan Greenspan has.à As for
Ariel, he says its value is probably somewhere between
those extremes of $57 and $3.
Ariel was co-founded
17 years ago by chairman Anthony Angello as an audio
company, but has evolved over the years. Early on, for
example, it made a gizmo that delayed the arrival of
sound to speakers, so that listeners in the rear of a
large rock concert would hear music from the stage and
speakers simultaneously. From audio the company moved
into digital signal processing and making tools
engineers use for products with the DSP microchips that
are at the hearts of devices like modems and cell
phones.
Arielås expertise in this area has allowed it
to capture high-profile contracts such as developing the
digital microphone in Steve Jobså Next computer and
making products for the military. ãWe donåt know exactly
the application, but every time Electric Boat launches a
nuclear submarine, they buy four boards from us,à says
Schneider.
In the first nine months of the year,
Ariel had sales of about $8.7 million, about 90% of
which was the result of technical products it has
supplied as an original equipment manufacturer. That
compares with $13.6 million the prior year when it had a
large contract from Compaq to supply modem boards for
ãenterpriseà applications, where companies maintain
computer networks that can be dialed up directly. As
many companies now use the Internet for such
communications, that business dried up. Important
contracts today include sales of modem boards used by
Motorola in Nextel base stations, and supplying boards
for an Internet service AT&T Wireless is creating for
2,200 airplanes on which it provides wireless telephone
service.
In January 1999, a new management team led
by CEO Jay H. Atlas, a former Digital Equipment
executive and investment banker, came on board. The
directors felt the company needed new talent after they
began focusing on a new business, selling remote access
concentrators to Internet service providers (ISPs) for
use at their so-called points of presence. These
facilities allow users to dial into the Internet with a
local phone call. Ariel makes expansion cards that allow
computers to support up to 96 telephone calls, which are
then routed over trunk lines to and from the Internet
service providerås main facility or network operations
center. According to Schneider, roughly a third of an
ISPås operating expense comes from shuttling data over
these trunk lines.
Instead of buying custom-built
concentrators, Ariel says ISPs can save money using its
modem cards and software in plain vanilla personal
computers that run a standard operating system like
Windows NT or Linux. Schneider believes personal
computers will replace custom made concentrators just as
they have eradicated custom-built word processors. Ariel
says it can provide an ISP with a port into the Internet
for about half of what competitors such as Lucent
Technologies and Cisco charge for custom built
equipment. Because it uses a computer instead of a dumb
box, ISPs can reduce the amount of traffic moving
over their trunk lines and save money. Ariel is
targeting smaller ISPs as customers.
After the way
Arielås stock bounced, Schneider says ãI now know how a
beach ball at a rock concert feels. As a little company
we do not have the resources to respond to all the
inquiries that we are getting. There is no way that a
company that had less than 10 million shares available
to trade--far less--should have, could expect, or plan
for a week in which 150 million shares were traded. The
entire ownership of the company changed hands 15 times.à
Chris Dupin
Associate Editor
Business News New Jersey
104 Church Street
New Brunswick, NJ 08901
Phone: 732-246-5726
Fax: 732-249-8886
email:cdupin@njbiz.com |
