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A Rash of Buying at Cypress Semiconductor

In a new column, Bob Gabele looks at unusual insider buying at the chipmaker.
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Editor's note: With this column, we introduce Bob Gabele, whose analyses of insider trading appear regularly in The Wall Street Journal, Barron's, CNBC and CNNfn. As head of insider research for First Call/Thomson Financial, Gabele has created an extensive database on insider stock and options holdings, which enables him and his staff of analysts to compare current insider trading activity against both competitors and a company's own historical context. Look for Gabele's column to appear Mondays on Neither Gabele nor his analysts have any position in the companies mentioned in this column. As always, let us know what you think.

What's up with

Cypress Semiconductor

(CY) - Get Cypress Semiconductor Corporation Report

? In late March, company insiders exercised large blocks of long-held stock options, acquiring nearly 700,000 shares between them. Better yet, instead of subsequently selling, they held onto every share.

Prominent among those exercising is CEO T.J. Rodgers, who accounted for more than 200,000 of the shares acquired. Also in the mix: Chairman Eric Benhamou, CFO Emmanuel Hernandez, Director of Research and Development Antonio Alvarez and others. And no, the vast majority of the options were not due to expire anytime soon -- not, in fact, until 2003. Highly unusual.

In the past when Cypress insiders exercised options, they, like most insiders, abruptly cashed out. The current purchases, meanwhile, were facilitated by company loans. Make no mistake, this is no ordinary loan program. Most company-sponsored loan programs are designed to maximize publicity. They are accompanied by much fanfare (e.g. press releases) and aimed at enticing insiders to buy in the open market. Cypress, by contrast, has been extremely low-key: There's no mention of loans to company executives in the company's April 7 proxy filing.

The activity is all the more unusual because insiders who do not want to part with cash to exercise their options have lots of other alternatives. The easiest is simply returning some of the shares to the company to satisfy the balance due. Not only is this practice common (and remarkably painless), it has been used liberally by Cypress insiders in the past. Instead, by borrowing to exercise options, these execs have maximized their holdings, thus leveraging their exposure to any rise (or fall) in Cypress' share price.

Finally, many of these were nonqualified stock options. It is a little-known fact that so-called nonquals carry tax ramifications that penalize insiders should the stock drop after exercise. The upshot is that, by exercising nonqualified options -- and


selling the underlying shares, the insider pays capital gains tax on his or her


gain, even if that gain is subsequently wiped out by any fall in the share price. Because of this risk, it is an exceedingly bullish sign to see insiders exercising their nonqualified options and holding onto the shares.

The question, then, is why? Or better yet, why now? According to CFO Hernandez, the loans were offered to encourage the exercise of options. This, he says, would facilitate the desired pooling-of-interest accounting for Cypress' recent acquisition of

IC Works

. Whatever the case, history teaches that when insiders exercise nonqualified options and hold onto the shares, the activity often precedes a significant rise in the share price.

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in the mid-1990s, for example, insiders exercised nonqualified options in large numbers ahead of news that

Warren Buffett

had taken a position in the stock. They were rewarded as the share price quadrupled over the next four years.

You've got to like the tape action in Cypress so far. Note the persistent bidding at the 10-11 range, even during periods of tech sector weakness. Likewise, the shares consolidated at around 10 before last week's quick jump to a new high of 12 1/4.

Over the years, we've grown accustomed to such insider behavior as a precursor to potential takeover activity. Earlier this month, Cypress competitor

VLSI Technology


agreed to be bought out by

Royal Philips Electronics

(PHG) - Get Koninklijke Philips N.V. NY Registry Shares Report

at 21, more than twice the going price as recently as March. It just so happens that VLSI executives were also exercising nonqualified options before the announcement. At Cypress Semiconductor, the insider picture couldn't be more fascinating. Wall Street games are rarely as simple as they appear, particularly when trying to assess the behavior of insiders.

The most blatantly bullish situations often appear so precisely because insiders want it that way. Far more interesting to us are the more subtle clues that insiders would prefer to disguise. Without so much as a single share bought in the open market, the quiet accumulation by Cypress insiders speaks volumes.

Bob Gabele has been tracking and analyzing insider trading since 1978, most recently for First Call/Thomson Financial. This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at