Mike:
As we have discussed in the past, today's CEO's and CFO's have got this "writedown" business honed to a fine art. For those unfamiliar with the sleight-of-hand, the basic ideas include:
(a) Provide the market with quarter after quarter of good results (even more preferably with "growth") by capitalizing as many expenses as possible for as long as possible. As the balance sheet bloats, the smell sooner or later becomes untenable, so at that point, write everything on the balance sheet down as severely as is possible (don't worry about the auditors, today they will approve darned near anything). Now do the whole thing all over again. No analyst will ever fault you for the write-offs, indeed, most will applaud, knowing that "earnings" will benefit for the follow-on quarters.
(b) Purchase other companies. Pay for them preferably with your own inflated stock. When the company is brought into the fold, write off as much of its assets as you can get away with (just about all of it....see CSCO's last few). In addition, take a huge write-off for "R & D -in-process" or whatever. Now you possess some producing (hopefully) assets that will generate revenues, with the neat thing being that they have been pre-amortized. This creates a nice looking profit line for a few quarters. Never mention in your quarterly reports that the "growth in revenues" was essentially purchased, usually expensively via shareholder dilution. Most "investors" neither notice nor care, and the analysts are sure not going to point it out. Keep the purchasing going as long as Wall Street will ante up the dough.
(c) Build more product than can be sold. Place excess product into inventory, thus reducing the expense line. Every few quarters, write off inventories via a "one-time-only" or "non-recurring" charge. Now you possess products that can be sold at any price and still produce remarkable margins (they have no offsetting cost-to-produce). This provides two to three quarters of exceptional "profitability" See Apple, and Gateway for details on the details. (g)
Mike, that was a good article. My question is, where are the anal;ysts who used to make mincemeat of companies that pulled off such pranks?
Best, Earlie |
