At the T. Rowe Price Trading Desk (A) Tuesday, August 21, 1984 It was 9:58 a.m. and the markets were about to open. Greg Donovan, one of two traders for the T. Rowe Price New Horizons Fund (and accounts holding similar securities) was going over the list of buys and sells that he was hoping to execute during the day. Greg saw his most difficult task being the sale of a large block of Avantek shares. Avantek traded in the Over The Counter Market (OTC) and had been around $25/share during the previous few weeks, after being as low as $18 in May. (Exhibit lA). The T. Rowe Price analyst covering the company thought that an earnings disappointment was imminent, and that news to that effect would cause the stocks price to plummet back into the teens. The analyst liked the stock on a long-term basis, however, and only wanted to trim down T. Rowe Prices current position of around 600,000 shares. Gregs instructions were to sell 183,000 shares at a price no lower than $23. At 10:30 the Dow was up $7.50. Greg looked at the screen of his NASDAQ machine and saw that Kidder Peabody was the highest bidder for Avantek at $24 5/8. Several brokers were at $24 bid, with yet several others, including Goldman Sachs, at $24 3/8. (These bids were all for only 100 shares.) Goldman, knowing that T. Rowe Price had a large position in Avantek, had called earlier that morning to say that it was a buyer of the stock in sizeable quantities. Goldman was the largest and most preeminent OTC dealer, and would regularly offer to deal in large positions (50,000 shares or more) for its own account. Greg decided to try Kidder first. Kidder historically had not committed much of its capital to the OTC market, but recently had decided to try to become a more prominent player. It seemed to Greg that he might get a better execution from Kidder since they would gain visibility on a trade of this magnitude and they might even be willing to lose a little money on the trade. In addition, T. Rowe Price liked Kidders research, and here was an opportunity to compensate them, in part, for that service.1 Greg in any event often looked for opportunities to trade with brokers other than Goldman Sachs since T. Rowe Price tended to get the best execution from Goldman, and typically did a disproportionately large share of its trading through that firm.

At 10:40 Greg somewhat nervously picked up the phone. Greg (talking to Steve, a Kidder trader): Hi Steve, I see youre interested in some Avantek. How much do you want to buy? Steve: Let me see. Ill call you right back. Two minutes later: Steve: I can do 12,000 shares at [24] 5/8. Greg: I am interested in a more medium sized quantity. Can you do better? Steve: I dont really think so. But, let me look again. Dont do anything until I get back to you. Ten minutes later: Steve: Look, the best I can do is 20,000 shares. Greg: Thats not enough. It seems as if I am going to have to go elsewhere. Is that OK? Steve: (After a pause) If I do more, say up to 35,000 shares, will you then deal? Greg: No, thats still not enough. Im just going to have to go elsewhere. OK? Steve: I suppose youll have to. Greg was upset with himself. He had hoped to be able to do a large trade with Kidder. However, all Steve had done was to try to get him on the hook, and he was not going to bite. The hook referred to a situation where if you did one trade with a dealer and had more of the same stock to trade, then by the implicit rules of the game you would have to give that dealer a right of first refusal on what remained. The dealer typically would have taken part of the other side of the trade on his or her own account, a position that would be endangered if you then went and offloaded the rest of your position elsewhere. Greg was afraid that, if he did do an initial trade with Steve, the price of this lightly traded stock might fall by as much as one or even several dollars as Steve scurried around looking for more buyers knowing that he most likely had Greg on the hook for a lot more. Not all was lost at this point, however. By getting Steve to answer affirmatively when he had asked if he could go elsewhere, Greg had at least obtained an implicit commitment from Steve not to tell other traders of T. Rowe Prices intention to sell a large quantity of Avantek. At least, not immediately. At this point Greg felt that his only option was to call Michael, a trader at Goldman Sachs. He wanted to move quickly and knew that Goldman would be willing to do the whole deal for its own account if necessary, as evidenced in particular by the early morning phone call. The problem was that Greg now had to tell Michael that Steve already knew about the deal. Thus, since Goldmans position would now be riskier, Michael was unlikely to give him as good a price as he might have had Greg gone to him first. Greg decided that perhaps the best way to approach Michael was to offer him a swap. For several weeks New Horizons had been adding to an already substantial long-term position in Tandem (also traded OTC) and Greg had done several of these trades through Michael. In fact, Goldman had mentioned that morning that they knew of a seller of Tandem. New Horizons and related accounts were interested in acquiring up to another 320,000 shares of this stock in the near term. It was up to Greg to choose how and when to acquire it. Gregs decision was to offer Michael both the Tandem purchase and the Avantek sale as a package deal. At 11:25 he placed the call. At this point Kidder still showed up on the screen at $24 5/8 bid on Avantek, with Goldman at $24 3/8. During the course of the morning, small lots of Avantek stock had traded at levels as high as $24 7/8. (Exhibit 1C). Tandem, being much more active, had traded in small lots in the range $15 1/4$14 7/8, with a 10,000 share block having just traded at $14 7/8. (Exhibit 2C). Currently, the lowest asking price for Tandem was $15 1/8 (Kidder, Salomon, Merrill), with Goldman asking $15 3/8. The Dow was up $11.81 for the day so far on moderate volume. Greg: Id like to do a swap of 183,000 Avantek for 320,000 Tandem. Michael: Now those are the kinds of deals I just love! Is it a package deal? A one shot deal? What? I like one shot deals. Greg: One shot. Then, apologetically: Listen, Ive already talked to Kidder but didnt give him any numbers. I did it because theyre good on research. But, he only wanted to bid for medium size. Michael: Ill get back to you. 15 minutes later, Michael called back to say that the Tandem side of the deal was easy to do, but that the Avantek part was harder; no prices as yet. He called back once again at 12:22. Michael: I can do Avantek at $23 and Tandem at $15 1/4. Background T. Rowe Price Associates, Inc. was an independent investment counseling firm, founded in 1937 and located in Baltimore, Maryland. In 1984, the firm had $15.5 billion under management. This was divided about equally between fixed income and equities, and also about equally among 12 mutual funds on one hand and separately managed accounts on the other, the latter consisting mostly of large corporate pension plan accounts. The New Horizons Fund was founded in 1960 and, in 1984, was the largest and oldest emerging growth mutual fund in the United States. The Funds objectives were to invest in companies in the early stages of their corporate life cycle, before they became widely recognized. On June 30, 1984, the Fund had $1.2 billion in assets, of which 88% was invested in the common shares of 161 companies with five year EPS growth rates estimated to be at least 25% per year. The remaining 12% was in short-term fixed income securities. Investment decisions for the New Horizons Fund were made by an investment advisory committee consisting of the president of the Fund, a trader (Greg), and five analysts who spent most of their time researching emerging growth companies. The analysts each managed a portion of the Fund corresponding to their areas of expertise, and could make individual stock selection decisions without prior committee approval. They were also responsible for coordinating and overseeing the trading in their stocks. The committee actively allocated the Funds assets across these analysts, and based its decisions on their and the presidents collective judgments. The committee generally sought stocks with greater growth potential, better fundamentals, and lower relative valuations. T. Rowe Price employed six equity traders in all, including the head trader who had been with the firm for 25 years. Greg was a Vice President and had thus far spent 6 years at the firm, having previously had 10 years of trading experience at other investment management institutions. In addition to serving on the investment advisory committee of the New Horizons Fund, he had some discretion to trade in stocks already owned by the Fund. For example, he could of his own accord increase an existing holding if there was a seller desperate enough to accept a very low price. In 1983, the equity trading desk did about 23,000 trades across all accounts, averaging $36,000 per trade, totaling $8.1 billion, and split 50-50 between purchases and sales. The market capitalizations of the companies traded averaged $5.5 billion. The New Horizons Fund accounted for 18% of this trading in companies with market capitalizations averaging $750 million. (See Exhibit 5.) Recent Developments Relating to Avantek and Tandem T. Rowe Prices initial position in Avantek dated back to 1978 with the purchase of 320,000 shares at $1 3/4 (split adjusted) by the New Horizons Fund. The firms position in this stock increased over the years, reaching 871,000 shares on March 31, 1984 (see Exhibit 1D). The bulk of this increase occurred in portfolios other than New Horizons. Some selling and repurchasing took place during these years based on occasional near-term fundamental concerns on the part of the Aerospace/Defense analyst covering the company. In June, 1984, this analyst traveled to California to meet with the managements of several New Horizons Fund holdings. Upon his return, he issued an update on Avantek with the stock then trading at $23 1/8. He concluded that On balance, I was very satisfied by my visit to AVAK. . . . I continue to be a buyer of AVAK below $18 and a seller at $24. With the surge in the stock market in early August, Avantek rose above $24, and the New Horizons Fund and related accounts sold about 200,000 shares of Avantek between $24$25 on August 2nd and August 3rd.2 No further selling took place prior to August 21, 1984, when, based on further research by the analyst, a sell recommendation was written with the stock at $24 5/8. Excerpts are as follows: The pricing on low noise amplifiers (LNA) for the home satellite television (TVRO) market continues to collapse. . . . I expect that the margin squeeze will cause third quarter EPS to fall below the $0.21 reported in the June quarter, which would be a major disappointment. I have revised my third-quarter estimate downward to $0.18 from $0.23. Although the TVRO problem may be a reflection of the seasonal summer slowdown, I see no way the company can make up the earnings in the fourth quarter. With the drop in my estimate for the year, and the possibility of a protracted profit squeeze in TVRO, AVAKs valuation goes from rich to ridiculous. I recommend immediate sale. The problem here is that Wall Street has very high expectations for AVAK. Everyone is looking for a 50% EPS gain this year, followed by 35% or more next year. It is too early to tell what will happen in 1985, since military components margins could rise dramatically, but 1984 will not meet the consensus estimate of $0.90 without a miracle in TVRO. In any case, the good news is in the stock. This is a well-managed company with good products in good markets. It is my judgment that the stock price today is out of line with AVAKs prospects. I recommend sale, with an eye to repurchasing in the $18$19 range. Regarding Tandem, the New Horizons Fund and related accounts began accumulating a position in the stock in late 1981 and early 1982, and reached a position of over a million shares at an average cost of approximately $22 per share by the end of 1982. Based on some short-term fundamental concerns, this position was reduced in the first quarter of 1983 by about 200,000 shares at an average sale price of $28$29 per share. The analyst however remained intrigued in the longer term with Tandems niche market position in fault-tolerant computers and continued to like Tandems long-term growth prospects. The remaining position was held through the balance of 1983 and the stock performed quite well closing the year at $35 1/8. The Company, however, experienced fundamental problems in the first half of 1984 relating to revenue shortfalls and the stock plummeted from $35 1/8 to a low of $13 in August 1984. On August 1 the analyst issued the following comments on Tandem, with the stock at $13 7/8. Tandem (TNDM) has once again disappointed with its latest quarterly EPS report and its stock has sharply retreated to mid-1980 price levels. . . . I have reduced my FY1984 EPS estimate from $1.01 to $0.80 and my FY1985 estimate from $1.60 to $1.25. I have also reduced my secular growth rate assumption from 35% to 25%. In spite of the prevailing gloom about the company, I remain encouraged by TNDMs product capability, balance sheet strength, and much improved financial control. I believe TNDM will produce excellent investment returns from current levels over the next 1224 months but would not expect TNDM to outperform other cyclically sensitive technology stocks near term. . . . At current price levels, I suggest another serious look, with the price being right but timing perhaps still premature. New Horizons Fund and related accounts began adding to positions in Tandem in late July, accumulating another 600,000 shares prior to August 21st, 1984.

Q. What would be the most likely fair value during that period for Tandem that would make sense to Goldman?