" Heads roll at Sonova after share sale debacle" by Matthew Allen

Three top managers have resigned at hearing aid maker Sonova, as the firm admitted mistakes leading up to a profit warning that was preceded by a huge share sell-off.

Chairman Andy Rihs denied accusations of insider trading, but demoted himself to a lesser role on the board. Chief executive Valentin Chapero and chief financial officer Oliver Walker resigned and will leave the company.

The exodus of top brass followed a breakdown of communication between executives and board members that had damaged Sonova’s reputation, the company said at a news conference in Zurich on Wednesday.

The controversy surrounds the sale of 300,000 shares by Rihs on March 8, worth SFr37.5 million ($41 million). Just eight days later, Sonova issued a profits warning, bringing down the share price from SFr128 to SFr115.

At the news conference, Rihs repeatedly denied insider trading and offered to buy shares back at the value that he sold them for.

Rihs pointed out that he had sold Sonova shares in the past, reducing his holding from 25 per cent to nine per cent in the last few years. The main reason for cashing in shares in March was to help finance a bicycle factory in Grenchen, canton Solothurn, the former head of the now defunct Phonak cycling team added.

“I had no prior knowledge of the profit warning when I sold my shares,” he said. “[But] as chairman I feel partly responsible for the reputational damage this has caused to the company, staff and shareholders.”

Investigations

Rihs protested that as board members only met a few times a year and relied on executives to keep them informed of day-to-day progress, he had been the victim of poor communication. He added that he had nothing to fear from regulators who may examine the transaction.

An investigation carried out by a German law firm at the behest of Sonova also found no evidence of wrong-doing. The probe blamed a failure by the company to make public its problems early enough and to initiate a share trading ban in time to stop transactions.

CEO Chapero and CFO Walker were forced to hand in their resignations as a result of the findings.

“I am not happy with how our internal processes worked. Information was not disseminated fast enough,” newly appointed Sonova chairman Robert Spoerry told swissinfo.ch.

But the company’s troubles, and those of Rihs and other key staff, might not end with the conclusions of the German law firm.

The Swiss stock exchange is investigating the timing of Sonova’s profit warning while the financial regulator, Finma, said it looks into unusual share trading patterns as a matter of course.

Setbacks mount up

Insiders at Sonova sold shares worth SFr47 million just before the profit warning was issued – several times the normal trading volumes. Sonova declined to comment on who else besides Rihs had sold shares in this period.

Sonova’s recent problems have come against the run of play, having established an excellent reputation as one of the global leaders in hearing aids.

But the company’s venture into the latest cutting-edge technology – “invisible” implants that can be inserted deep into the ear – have resulted in setbacks.

Delays in the launch of one key product were compounded by the recall of another product late last year that cost the firm SFr200 million in goodwill impairment charges. The profit warning on March 16 reduced both operating margin and sales growth forecasts.

Spoerry told swissinfo.ch that the strengthening Swiss franc had also adversely affected business.

“We were well on track until the end of last year,” he said. “January was a difficult month with product recalls and a harsh winter in the United States meant that elderly people did not go to the shops. Unfortunately we reacted [to these setbacks] too late.”

From problem to crisis?

Sonova said on Wednesday that the departures of Chapero and Walker and the demotion of Rihs were intended to restore market confidence and repair reputational damage to the firm.

But Bank Sarasin analyst David Kägi said the measures appeared “harsh” and questioned whether the loss of talent would help or hinder the company get out of its present position.

“Sonova had some problems, but they were not in deep trouble,” he told swissinfo.ch.

“But the loss of all three top leadership positions could have developed the problem into a crisis. Losing a CEO with such a good track record in innovation and execution looks like a high price to pay. The market will be left wondering if there is anything else behind it.”

But the company insisted that its fundamental business model remains strong despite the current difficulties.

“Our problems are temporary and they are not structural,” interim CEO Alexander Zschokke said. “The job of management is to bundle together our innovative strength and know-how and move it in the right direction.”

Matthew Allen, www.swissinfo.ch