When a surprise flood of orders for shares of Transaction Network Services Inc. hit the floor of the New York Stock Exchange late last Friday afternoon, stock exchange officials quickly called the company's headquarters in Reston to ask what was going on.
The person who is the NYSE's designated contact at the company couldn't immediately answer that question because top executives had scrupulously limited the number of people who were in on a $720 million secret: They were discussing a merger with PSINet Inc. of Herndon.
But somebody apparently knew--or guessed--that something was going on, and could have made about $2 million by snapping up the shares during the last couple of hours of trading.
That windfall prompted the NYSE to start investigating the apparent leak, said TNS counsel John J. McDonnell III "and I wouldn't be surprised if the SEC is too."
In keeping with their usual policies, the Securities and Exchange Commission and the NYSE declined to comment on whether they are looking into the possibility that illegal trading on inside information was behind the surge of buy orders that pushed the company's shares up $6 on Friday to a record high of $34.25 a share.
When the merger agreement was announced Monday morning before trading began, the stock jumped again, to $45 a share, approximating the value of PSINet's offer. Under the proposed deal, for each of their shares, TNS shareholders would get $22.50 cash and half a share of PSINet stock, which was trading for about $45 on Friday. PSINet shares have moved up since then, closing yesterday at $51.37 1/2.
TNS operates the biggest communications system linking credit card machines in stores to the computers of all the major card issuers.
PSINet owns a nationwide communications network that carries some of TNS's business. Combining the two companies will mean more traffic for PSINet and lower costs for TNS. And it will also give PSINet an entree to provide other services to the millions of merchants and credit card companies that already do business with Transaction Network Services.
McDonnell said TNS kept a close hold on merger talks with PSINet. The negotiations resulted in a formal buyout offer from PSINet Chairman William L. Schrader last Thursday night. With a bid on the table, company president and chief executive John J. McDonnell Jr.--the father of the general counsel--called a special board meeting for Friday morning--with some members participating via a conference call.
But the senior McDonnell already had other engagements for Friday--a round of four meetings with securities analysts in New York. Those meetings were canceled at the last minute, without any explanation, the lawyer said.
It's possible that someone who found out about the canceled meeting made an educated guess that something was afoot that could boost the price of the company's stock, the general counsel said. But the rush of orders for the stock did not begin right away--which could mean cancellation of the meetings was not what triggered it.
During Friday morning's trading session only about a dozen trades were made in the stock, which trades under the symbol TNI. At 12:30 p.m. the tape showed the stock holding steady at $28.25 on volume of 44,000 shares.
After lunch, trading picked up a little and so did the price, which moved up a couple of ticks to $28.62 1/2 by 1:30.
Sometime after 2, however, a flood of "buy" orders began to hit the floor. By 2:30 Transaction Network Services was up past $30 and orders were pouring in. In the next two hours investors gobbled up more than 170,000 shares of the stock--almost three times the normal volume for a full day. By the time the bell rang to end trading, the stock was up more than 20 percent to an all-time high of $34.25.
Though both companies were careful about keeping the secret, some outsiders had to be told of the possible merger, the general counsel said. PSINet needed to get approval from its banks to make a major acquisition and talked to them Thursday about the possible deal, he added.
When the stock started moving Friday afternoon, it triggered the surveillance systems that all the stock exchanges use to monitor trading. When the alarms go off, the standard procedure is to call the company. If news that could affect the price of the stock is imminent, the exchange halts trading, so that all investors have the same information.
In this case, the spurt in trading came so late in the day that by the time the exchange reached someone who was in on the secret, the market was getting ready to close.
Fearing further leaks, executives of the two firms worked all weekend to complete the deal before trading in their stocks began Monday morning.
CAPTION: Transaction Network Services CEO John J. McDonnell Jr.'s cancellation of meetings last week may have led someone to guess at an impending deal.
CAPTION: Sudden Spike (This graphic was not available)