[plug] [links] [OT] Microsoft Financial Fraud

[Leon Brooks]

On Tue, 3 Sep 2002 15:17, Craig Ringer wrote:
>>     http://www.usagold.com/gildedopinion/microsoftfraud.html

>> I take it you hold a significant number of stocks and shares? (-:

> Nope. However the article implies that it could all come falling down
> and cause some significant economic "waves"...

> Still I don't know if I can really credit it, too much of the article
> makes statements w/o providing where he got the info etc.

AFAICT it should all be publicly available. His spreadsheet looks simple and 
clear enough.

Interesting sites linking to it:

    http://www.ex.ac.uk/~RDavies/arian/scandals/classic2.html (end of page)

    http://www.aaxnet.com/topics/msinc.html (thorough history! good read)

    http://www.wikipedia.com/wiki/Microsoft (large entry!)

    http://www.nyx.net/~lmulcahy/microsoft-bad-faith.html (random anti site)

 http://www.charmed.com/people/alexlightman/2000-03TheAsianInternetCentury.php

 Interesting article. Quote:

    Three Indian software companies have listed in the United States,
    including Wipro, whose top man is No. 3 on the world's most wealthy
    list at $30 billion. Prediction: after Microsoft's crash (visit
    BillParish.com to see what could happen), India may be home for the
    first time in thousands of years to the world's richest man.

    http://www.goldensextant.com/commentary5.html

    Quote again (big one this time):

    In a recent online analysis ("), a Portland, Oregon, investment
    firm contends that under proper accounting practices, Microsoft
    is not even profitable. It is not necessary to accept this
    startling conclusion to appreciate two fundamental and very real
    problems that this study points up.

    The first is the effect of stock options on reported wage
    expenses, particularly in the technology sector. In a bull
    market, employees are willing to take stock options in lieu of
    salary. When exercised, the employee is taxed on the basis of
    market value. That is, the difference between the exercise price
    and the market price is treated as income, on which the employee
    is then taxed regardless of whether the stock is sold. The market
    price thus becomes the new basis for future capital gains taxes.
    The company takes an income tax deduction equal to its tax rate
    times the employee's calculated income, but typically records no
    corresponding charge to earnings on its P&L. Thus, while the
    newly issued stock causes dilution in per share earnings, the
    wage or salary expense that it represents -- the difference
    between the market price at issuance and the exercise price --
    does not impact earnings and increases reported cash flow by the
    amount of the tax deduction.

    Whatever one thinks about the accounting conventions that
    apparently allow this treatment, it is clear that companies
    compensating large numbers of important employees in this fashion
    are headed for significant financial and personnel problems
    should their stock prices merely level out, never mind fall. What
    is more, this situation produces substantial incentive for
    companies to try to push their stock prices ever upwards by
    managing earnings, repurchasing shares, or in Microsoft's case
    even selling put options to institutional holders of large blocs
    of its stock. Indeed, sale of put options has in recent quarters
    generated a not insignificant amount of cash for Microsoft while
    allowing some of its largest shareholders to enjoy at least the
    illusion of protection.

    The second problem underlined by the Microsoft study is the
    danger of stock indexed investing done with no regard to
    underlying stock values. The 1972-1974 bear market, which took
    the Dow from over 1000 to under 580, ended the "Nifty-Fifty" era
    and discredited the widely held belief that smart investing
    consisted merely in buying and holding a few blue chip or
    so-called "one-decision" stocks. As a practical matter, this
    belief is reincarnated today under the guise of index investing,
    a perfectly valid and useful concept until taken (or gamed) to
    nonsensical extremes. Throwing funds at capitalization-weighted
    indices while remaining blind to the underlying value of their
    largest components has produced extreme overvaluations in
    certain "gorilla" stocks.

    Like Microsoft, many of them are technology stocks, allowing
    their "new era" aura to trump more mundane considerations
    relating to profitability and sustainable growth rates. Among
    the Dow stocks, they now include after the recent changes: AT&T,
    Hewlett-Packard, IBM, Intel, SBC Communications and Microsoft.
    Others include: AOL, Cisco, Dell, Lucent, MCI Worldcom and Sun
    Microsystems, six stocks which on November 15, 1999, had a total
    combined capitalization just over $1 trillion, a median PE ratio
    over 70, and an average PE ratio over 100.

    Industrial and consumer stocks, too, have been swept up in the
    indexing mania. More than anything else, index investing
    explains why General Electric, the next largest stock based on
    capitalization after Microsoft and also a Dow stock, can trade
    at a trailing PE over 40 when until 1996 it almost never traded
    at an average annual trailing PE exceeding 15. What is more, not
    one of its historic or projected growth rates (sales, cash flow,
    earnings, dividends or book value for the past 10, 5 and next 5
    years) as reported by Value Line exceeds 15%.

    A few months ago an experienced investment manager asked
    rhetorically in a Barron's interview: "Who is going to buy GE at
    a PE over 30?" Now he has his answer: index investors, the same
    people who buy other gorilla stocks at eye-popping PE ratios. Who
    are these index investors? Many of them are the country's largest
    pension funds, making the prospect of fair valuation in the
    largest cap stocks so unnerving as to render a bear market
    virtually unthinkable. According to the Microsoft study cited
    above, the California State Teachers Retirement System owns more
    than 16 million Microsoft shares with a value of about $1.4
    billion based on its commitment to indexing against the S&P 500,
    of which Microsoft accounts for about 4%. Unfortunately,
    particularly in the investment world, "unthinkable" and
    "impossible" are not the same thing.

    http://landru.i-link-2.net/monques/debtscam.html (chilling stats)

The summary seems to be that even if Microsoft doesn't go toes-up soon, the US 
economy will.

Cheers; Leon