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Technology Stocks : Disk Drive Sector Discussion Forum
WDC 153.96+0.7%Nov 19 3:59 PM EST
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To: Robert Douglas who wrote (5194)1/8/1999 1:49:00 PM
From: Mark Madden  Read Replies (1) of 9256
 
Robert,

<While pumping up earnings right before an offering is a time-honored tradition, the scene you painted is highly questionable in its legality and would likely provoke SEC investigation if discovered>

I agree, it is not unusual for companies to "pump up" earnings any time they can. However, I think Lawrence's example of $5 to $1 is exaggerated. I think the conference call mentioned something like $1.90 to $1.60. Anyway there are three common practice reasons for the higher front end price.
1. It is common to add the cost of research and development to early runs of a product. Look at high density TV.
2. It is common to pass on costs for accelerating production to the buyer. Of course the increased cost also carries profit.
3. The customer can't expect cut rate deals when their is heavy product demand. The customer had to pay asking price or go without.

A purchasing agreement may exist for lower prices in the future but they would never add statements indicating the purpose is to front end profit. Instead they would indicate the decreased price is in anticipation of lower manufacturing costs and/or paid off research. It would be tough for the SEC to prove different.

Actually, us rational beings know that most new products carry higher front end profit until supply catches up with demand. We also know companies make public offerings when the company looks the most attractive to the public. <g>

Mark
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