Thanks to OWNSTOCK over on the JDSU thread for finding this:
Why the tech bottom is NOT here yet: As valley boomed, CEOs felt pressure to inflate the books
By Deborah Lohse
Mercury News
During the boom times, as he faced immense pressure to act against his better judgment, Hyperion Solutions' chief executive, Jeff Rodek, liked to listen to a song by Jimmy Buffett about the thin line between partying Saturday night and praying Sunday morning.
Now it's Sunday morning across the nation, and CEOs are being hauled one after the other to the confessional. But the focus on rogue CEOs leaves out a wider picture: Many executives such as Rodek, who consider themselves honest, say they worked in the middle of tremendous pressure to stretch, if not break, the rules.
In an environment where some buffed the numbers, the price of doing the right thing was high and the payoff small. Companies that kept to the straight and narrow risked seeing their all-important share price doomed to mediocrity, making it harder to keep employees, raise money, compete with upstarts or even survive.
``It's not all greed,'' said Rodek, whose Sunnyvale company makes business software. ``Part of it is just competition. Business is a battle you either win or lose. There is no middle.''
The fastest way to send share price up was to make it look like more money was coming in the door -- whether or not that ``top-line'' revenue actually led to bottom-line profit.
Institutional (Own aside: the ones buying and selling most of the stuff by the way) investors ``were pounding the table saying what will get the stock moving is top-line growth,'' said Richard Owen, chief executive of AvantGo, a software company based in Hayward. The pressure was intense. ``Even if you wanted to be completely honest, it still creates bad business practices.''
One of the hardest things to resist, some executives said, were improper ``barter'' or ``round-trip'' transactions, where two companies swapped or bought each other's software or services and both of them booked it as revenue.
``You can absolutely see how we could have generated a higher stock price with a lot of barter,'' Owen said.
(Own aside: barter or round trip stock swapping works much better...but where is the investigation?)
Some potential customers would tell AvantGo that its competitors were willing to buy a substantial amount in a barter deal, Owen said. AvantGo lost a few deals worth a few hundred thousand dollars because it considered those transactions to be improper barter, he said.
Other companies got a secondhand taste of the hothouse environment.
Knight Ridder, the parent company of the Mercury News, invested in a small start-up in 2000, said Chairman and Chief Executive Officer Tony Ridder. Before its initial public offering, the start-up's executives wanted Knight Ridder to modify its investment to boost Knight Ridder's stake and give the young company more cash.
But upon closer examination, Ridder found that the start-up wanted to improperly book Knight Ridder's investment as revenue. ``When I heard that, I said, `Let's get out of this company as soon as possible,' '' Ridder recalled.
Tough decisions
The story of Hyperion under Rodek -- who joined the company in 1999 to help it recover from a botched merger -- illustrates many of the pressures that CEOs faced. Sometimes, Rodek said, he talked himself into deals that in hindsight he regrets.
Shortly after he started as CEO, he decided to sell a product from Alphablox along with Hyperion's software, acting as a reseller. That way, he got to legally show more revenue -- even though most of the money would flow to Alphablox or salespeople as commissions.
The move was designed to sell more of Hyperion's software. But Rodek admits he was also motivated in part by the fact that reselling ``did help us get more revenue going through the company, which was important for morale and other things.''
He later realized that the reselling deal confused analysts and customers, partly because Hyperion had a similar product, so he abandoned it.
``I thought it was a good idea in the heat of battle,'' he said.
At other times, customers, investors, employees and Wall Street leaned on Rodek to join in the madness all around them.
Rodek recalls that there were times he felt pressure from customers to buy software from them in order to win their business. He said he told his salespeople not to do business that way.
Investors also leaned on him. Companies were under pressure to buy other companies for the added revenue, even if it did not help profits. Some of Hyperion's investors watched enviously as other software makers bought company after company with their high-flying stock and were rewarded with stock prices in the triple digits.
Rodek resisted, and takes comfort now in the fact that the shares of many acquisition-happy companies now sell for a few bucks each, compared with Hyperion's price of about $21.
``Many of those decisions were painful to do but have since borne out,'' said Rodek.
Worker retention
Keeping employees was another concern.
In early 2000, ``customer relationship management'' or CRM, was a hot growth area for software companies. Hyperion had started a small unit working on a few products to analyze CRM data. An executive of the unit argued that Hyperion ought to cash in on the craze by spinning off the unit or creating a special stock for it. Investors would give it a huge stock price, he argued, with which he could attract and reward employees who joined the unit.
But Rodek vetoed the deal, worried that other Hyperion employees would be demoralized. The unit was shut down a year later.
Wall Street did not make his job any easier. Investment bankers suggested that Hyperion start a venture fund, where the company and top executives could invest a few million dollars, then sit back and reap the huge profits that savvy investors were getting all over Silicon Valley.
``I thought it might be a pretty good idea,'' said Rodek.
Still, he declined because he wanted to preserve corporate cash and realized that Hyperion's expertise lay in software, not investment.
Now, he's glad he did. ``Many companies have had to write off major investments in such funds in recent years,'' he said.
Hyperion gets high marks for integrity from some industry analysts. But others said they at times suspected Hyperion of some revenue gimmicks of its own.
The reason: Hyperion's ``days of sales outstanding'' figure, a measure of how long clients take to pay them, was unusually high until recently. Some analysts speculated that Hyperion might have been trying to boost revenue by making some dicey sales.
Rodek said the problem was due to poor internal billing and collecting processes and systems, which have since been fixed. But he says it took over a year to convince analysts that he was not playing games.
Analysts also said Rodek might have just been too busy cleaning up Hyperion's problems to get in real hot water.
``It was their inability to act that ended up saving them,'' said Steve Berg, a senior analyst Punk Ziegel, which has no banking relationship with Hyperion. ``It's kind of the tortoise-and-the-hare scenario.''
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Contact Deborah Lohse at dlohse@sjmercury.com or (408) 271-3672. |
