Christopher Byron spits at Cisco's latest....
IR-‘RATIONAL’ ACCOUNTING
By CHRISTOPHER BYRON
March 18, 2002 -- IS anything straight in Crooked Valley?
The question comes to mind in light of two documents that
drifted in recently on the breeze. The first: An analysis of a
twisted and hopelessly conflicted stock deal involving a
company called Rational Software Corp. And secondly, the
latest He-Man helping of bafflegab from the malarkey
machine at Cisco Systems Inc.
Together these two documents offer as clear an insight as
one could ask for, into the incestuous world of big business in
Silicon Valley for more than a decade.
During the 1990s, the executives who ran the software and
semiconductor companies that sprang up in and around Palo
Alto, Calif., came to believe that their soaring stock prices
had somehow unhinged them from the fuddy-duddy rules of
the boring old bunch back east.
THIS was the new world of West Coast entrepreneurialism,
with its own dynamics and rules, its own players and goals. In
this world, executives bought each other's stock, invested in
each other's companies, took in each other's wash and cut
each other's hair - over and over again until Silicon Valley
became a land of business hemophiliacs, where no one
thought twice about carnal union with the corporate
equivalent of one's own next of kin.
Consider in that regard the instructive report on Rational
Software by an insightful young financial writer named Cody
Willard.
We are indebted to Willard, who writes for the Street.com
Web site, for alerting his readers to an outrageous - though
almost totally uncriticized - stock ploy by the duo who run
Silicon Valley-based Rational Software (which is a nearly
$1-billion-a-year business, in case you're interested).
The two individuals in question - Rational's chairman, Paul
Levy, and the company's chief executive officer, Michael
Devlin - apparently figured that their base annual salaries of
$1 million each weren't enough to get by on. So in late 1999,
while tech fever was at 110 degrees and climbing, they
created a company called Catapulse Co. and issued
themselves roughly half its stock, then capitalized the
business with $50 million from Rational Software.
Then, after about a year Paul and Mikey had Rational buy
back Catapulse for $445.2 million in Rational stock, of which
$200 million tumbled into the gaping pockets of our two
heroes. And through it all, no one except Willard seems to
have batted an eye.
THE name for this sort of financial- world shell game is a
"spin-in," and no one plays ¦¦it with greater finesse than the
crew at Cisco.
The last time we heard from Cisco, on the subject of its
stupid accounting tricks, the Silicon Valley giant was all
torqued out of shape because we had shown the temerity to
suggest that the company's financial filings with the Securities
and Exchange Commission didn't add up. In particular, we
didn't like the ultra-chummy partnership deals the company
had set up so that members of its own board of directors
could profit in Cisco takeover deals. We documented plenty
of these deals. They involved Cisco's chairman of the board,
the vice chairman, the CEO and all sorts of top corporate
underlings.
Now comes yet another stupid accounting trick: a Rational
Software-style "spin-in" known as "Andiamo Systems Inc."
This deal is disclosed with peekaboo coyness in the
company's latest quarterly financial report to the SEC, filed
on March 11. A Cisco p.r. person was busy last week telling
reporters that the disclosure was prompted by a new SEC
guideline, but that is baloney.
The guideline in question, so-called FR-61, simply reminds
companies of disclosure rules that have been in force for at
least 15 years.
In the filing, Cisco reveals only that it has made investments
in four unnamed, "privately held, development-stage
companies" - one of which has been set up with a pledge of
$84 million in start-up capital from Cisco, which pledge could
grow to a total of $184 million if certain unspecified sales
targets are achieved by the start-up. If everything happens
just right, Cisco would then buy the company back for $2.5
billion in Cisco shares, no later than summer of 2004.
HERE is what was not disclosed in the filing, which Cisco's
controller, one Dennis Powell, let slip in an interview the next
day with The Wall Street Journal: that fully 25 percent of the
start-up's 200 employees are in fact actually employees of
Cisco itself, who have been granted "leave" to go work for
the start-up.
What's more, incorporation papers that we've obtained from
the office of the California secretary of state show that the
start- up in question, Andiamo Systems, is in fact housed in
an actual Cisco office building - on the third floor, to be
precise.
There have been rumors within Cisco that the whole start-up
fandango was in fact set up to placate Cisco's top
engineering honcho, one Mario Mazzola, who has been
described in the industry's trade press as the "mastermind"
behind the Andiamo project.
Mazzola was said to have been on the verge of leaving the
company for a juicy opportunity elsewhere in the summer of
2000, and was enticed to remain at Cisco through the spin-in
stock deal.
BUT the rumors may well be baseless. A Cisco spokesman
insists, quite emphatically, that Mazzola does not now have -
and never had - any interests in Andiamo whatsoever. If that
is the case, Mazzola himself would have stood to gain nothing
from the spin-in, with the gravy going instead to others.
As recently as last spring, the Andiamo Web site listed an
individual named "Tom Edsall" as the start-up's "co-founder
and chief technology officer." A widely followed industry
Web site, ByteandSwitch.com, said he, like other members of
the Andiamo executive team, was reachable through the
Cisco switchboard and used a Cisco e-mail address. But the
Andiamo site now lists the names of no employees,
executive-level or otherwise.
The mystery enveloping this Andiamo spin-in scheme is
simply preposterous. If this had been a straight-ahead
business arrangement, Cisco could have taken the $184
million it claims to have committed to the start-up and simply
hired some new people and put them to work as actual Cisco
employees, period.
Instead, the whole thing was set up like some kind of
Defense Department skunk works in the apparent hope that
no one would notice what was going on.
But the company seems to have known it should have fessed
up all along and now it has done so - though once again by
revealing the absolute minimum possible to claim it is telling
the truth.
In fact, of course, it isn't. In Hebrew folk wisdom, a half-truth
is said to be a whole lie.
And that's what we have here: A whole lie, wrapped in the
skin of an incomplete half- truth. It is how business has been
conducted in Crooked Valley for nearly 20 years. Are you
surprised?
Please send e-mail to: cbyron@nypost.com |
