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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Chuzzlewit who wrote (59815)	4/24/1999 7:51:00 PM
From: rudedog	Read Replies (1) \| Respond to of 97611

Chuz - I don't think there are accounting irregularities, but there are accounting problems. I agree 100% on this. First, the accounting you refer to (channel inventory and contra-revenue) does not exactly pop up on the balance sheet. But the introduction of both the Digital and Tandem businesses created a great deal of additional confusion. Both DEC and Tandem do extensive development as opposed to classic CPQ - back in '95 CPQ had an R&D target of 3% of revenue, which they pretty much stayed within. Prior to the merger, Tandem used to have numbers like 16% and 18% of revenue, and also capitalized some R&D which further confused things. I didn't follow DEC closely before the merger but several old hands from DEC said that they had a lot of transfer charges (much like IBM) which allowed one business group or another to look good independent of real performance. One person described the DEC "pendulum" where any product line which was making money got burdened but those that were losing money had most of their costs sucked up as R&D. I can not imagine how all of those different ideas about how to account for the business get rolled up into a single comprehensible picture. I think that one of the first tasks the new team should take on is to simplify the ways that they account for operations and sales and have that apply across the board. I can't imagine that even high level CPQ managers can understand how their individual operations tie into overall corporate health, as was obvious last quarter.

To: Chuzzlewit who wrote (59815)	4/24/1999 9:03:00 PM
From: rupert1	Read Replies (2) \| Respond to 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.