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Redback CEO's departure sparks selling

The broadband-equipment maker falls 9 percent after CEO Vivek Ragavan's resignation sparks a round of downgrades.

Redback Networks shares fell 9 percent after the exit of the company's CEO sparked a round of downgrades Tuesday. Analysts said the departure puts one of Redback's leading products in jeopardy.

Shares were off $1.69 to $17.31, well below its 52-week high of $181.

CEO Vivek Ragavan resigned Monday night. He joined the company in March 2000 with the closing of its acquisition of Siara.

Redback, which makes broadband equipment, said it hopes to secure a replacement CEO within the next two months. In the interim, Pierre Lamond, Redback's chairman, has assumed the role of acting CEO.

U.S. Bancorp Piper Jaffray analyst Conrad W. Leifur downgraded the stock to "neutral" from "buy," citing the risks that accompany this latest management change. Redback also has replaced its chief financial officer and head of sales in the past several months.

"The lack of continuity in the senior management team creates concerns regarding the ability of the company to execute during this difficult time," Leifur wrote.

The analyst said news that the company's development of its SmartEdge IP card is behind schedule also contributed to his downgrade. The IP (Internet Protocol) card, which is designed to improve video transmission over metropolitan networks, was expected to be in trials already; Redback said the card should go into testing in the September quarter and ship in the December quarter, one quarter later than expected.

"The completion of the IP card and its acceptance by carriers are particularly critical to the company's intermediate-term revenue and gross margin prospects," Leifur said.

Wells Fargo Van Kasper analyst Chet White downgraded the stock to "buy" from "strong buy," saying that "Mr. Ragavan was instrumental in the vision and delivery of Redback's industry-leading" SmartEdge product.

Kaufman Brothers analyst Clifton Gray also said the move puts Redback's leading product in trouble. The analyst maintained his "accumulate" rating and speculated that the company's CEO dismissal could "backfire" and cause the company even more grief.

Gray postulated that Ragavan was ousted by the company's board of directors for one of two reasons: Either the board is trying to sell the company to Juniper Networks or Nokia, and Ragavan did not agree with the transaction, or "the board was just plain dissatisfied with the performance of the company, and the blame fell on the CEO."

If the latter case is true--something Gray maintains is more likely--the board's move could backfire, he said. When Ragavan joined the company from Siara, he brought with him the SmartEdge line of products. Ragavan was noted for his strengths in product development and strategy, as well as for his specialty in the SmartEdge product, which Gray said is more key to growth than Redback's other businesses.

"Over the coming months, some may view this move as the right one for Redback to have made as each blip will be blamed on the former CEO, and shareholders will be able to sigh and take comfort in the fact that he is now gone. We do not agree," Gray wrote.