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Technology Stocks : Compaq
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To: Chuzzlewit who wrote (59815)4/24/1999 9:03:00 PM
From: rupert1  Read Replies (2) of 97611
 
The key phrase in your post is "the nature of the business". All companies which use distributors have to deal with the problem of ensuring that there is enough supply in the warehouses by taking the risk of oversupplying and then selling off excess inventory at a discount to make way for new models. Most companies use some form of factoring. Of course each business model has problems - but the ones you alluded to are conventional problems arising from the nature of the business, and not grounds for positing any special weakness in COMPAQ's case or any ground for suggesting obfuscation. You might as well say an elephant has a "problem" because it has a trunk.

Accounting principles are not adequate to the task of simply revealing the complexities of the real world. You could argue that COMPAQ and other companies should use principles that ensure the most conservative and simplistic presentation of the value of their inventory and their revenues. But why? Sectors develop conventions in accounting: within those conventions there is a degree of tolerance, a degree of uncertainty and inexactitude which is acceptable because, over time, any inequities are averaged out.

I am familiar with the argument that COMPAQ overstepped those conventions in 4Q 1997 and familiar with the argument that in so doing provided false support for its share price. Was this a mistake? Higher share values certainly helped achieve a better bargain in its acquisition of DEC. This might rile some of COMPAQ's critics and those with DELL religion, but was it a business mistake?

Whatever the historical truth, the fact is that COMPAQ has now reduced inventory and factoring to historically low levels. There is no inconsistency between the business model it is using and its accounting principles.
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