The Wrath of the Iomegans TALES FROM THE BULL MARKET
By Herb Greenberg

(FORTUNE Magazine) – Years from now, when I think back on what best characterized this bull market, I'll always remember Iomega. Not only did it have all the makings of a first-class mania, but it also made for great newspaper copy. During its heyday I was the San Francisco Chronicle's daily business columnist, and for more than two years "the I word," as Iomega became known, appeared in more than 90 of my columns. Each new mention became the latest in a saga known to my readers as "Iomega insanity." It was a soap opera complete with a hero (Iomega CEO Kim Edwards), a villain (me), and hundreds, if not thousands, of protagonists (the Iomegans--investors who congregated on America Online's Motley Fool message boards to cheerlead the stock that had made many of them rich).

Iomega's claim to fame was a portable disk drive for personal computers known as the Zip. I hadn't heard of either the Zip or Iomega until I wrote about both in a column on Nov. 7, 1995, headlined IOMEGA AND SYQUEST SLUG IT OUT IN BITTER DATA STORAGE WARS. I pointed out that Iomega's market value--then $507 million--had ballooned to nearly five times that of its rival Syquest, even though Syquest's sales were more than double Iomega's. To me it was just another fairly innocuous column about one company that may have been too expensive and another that may have been too cheap.

I was only the messenger, but I was about to get shot. With a bazooka. Within hours of the column's publication, my e-mailbox started to buzz with letters defending Iomega. The column sparked hot chatter on the Motley Fool's Iomega message board, which by that time was the equivalent of Iomega Central. Encouraged by Iomega execs, the Iomegans held a fervent belief that the Zip would become the de facto standard to replace the floppy drive on all PCs. Had that happened, Iomega's zip drive would indeed have been as big a deal in the hardware business as Microsoft's Windows was in software.

The chatter soon fed on itself. As Iomega's stock continued to rise, and as my e-mails became more emotional, "Iomega insanity" became an increasingly regular part of my column. By January 1996 I brought on the full wrath of the Iomegans by questioning the company's accounting practices (some bearish investors felt Iomega was reducing its reserves for bad debts in order to dress up its financial statements). A week and dozens of insulting E-mails later--with Iomega's stock still on fire--it had become clear that this was more than just a story about a controversial maker of removable disk drives. As I wrote at the time, it was also the story of the Internet, and how it's changing the way individual investors are exchanging ideas and linking up to get the upper hand on institutions. One anonymous Iomegan, known as Stig 1, responded in a message-board post by writing: "Iomega is merely the first and most notable in a long line of things to come from the birth of the Information Age for the individual investor.... Where once writers of respectable publications were taken to be pillars of absolute knowledge in the marketplace, they will become only pillars of salt from which investors will take grains."

By late February 1996, David Gardner, Motley Fool's twentysomething co-founder, was fueling the anti-press sentiments of his followers. In response to one of my columns, he wrote, "I feel genuine remorse for the many individual investors who have been conditioned to take investment advice from one-way media sources; and I also feel some regret for journalists who write what they hear, without very clearly identifying their sources."

By April the euphoria surrounding Iomega had become so intense that Gardner and his brother, Tom, were featured on the cover of FORTUNE as part of a special "Market Mania" report. (The story included a brief account on my role in the Iomega story.) By late May, as Iomega's stock reached its peak, I realized just how out of control the situation had become while sitting in a periodontist's chair, about to have gum surgery. (True story.) I had been making small talk with the doc, who admitted to knowing less about stocks than I know about gums. I mentioned the dangers of taking tips from strangers, especially patients. Just as he was about to stick a loaded syringe into my mouth, he said, "I did buy this one stock." You can hear it coming. "Iomega." Lucky for me, my jaw was already open.

After peaking later that month at $27 (adjusted for several splits), Iomega quickly retreated, and by July there were signs of trouble. The company's earnings missed the Street's so-called whisper number. Perhaps more important, as I had observed in one column, CEO Edwards used the word "challenging" in a conference call with analysts to describe Iomega's current business. "Any derivative of the word 'challenge' is never good news," I wrote. "It's a euphemism that must be taught in CEO school for 'trouble.'" For much of 1996 and 1997, Iomega's stock meandered, and it even mustered a brief rally. Iomega message boards on Motley Fool remained active with die-hard Iomegans trying to persuade others who had lost fortunes not to lose faith. However, the Zip never quite made it as a standard for all PCs, as Iomega had hoped.

By early this year Iomega was back to reporting losses. Then, in March, the bombshell: Without any warning or explanation, CEO Edwards quit. Two months later he was followed by chief financial officer Len Purkis. Then, just a few weeks ago, the company warned that it may be in violation of its loan covenants. The Iomega chat boards remain fairly active but somewhat more tame. And as for Iomega's stock: While it trades at 52-week lows, it's still well above where it was when I first mentioned it, and the spread between Iomega's market value and Syquest's is wider than ever. That's why, in my column, at least, "Iomega insanity" lives on. When it ends, the bull market will officially be over.

HERB GREENBERG is senior columnist for The Street.com. His E-mail address is herb@thestreet.com