Our panelists give you the scoop on all the inside business information before you hear it anywhere else in The Informer segment:
David Asman: Elizabeth – Accounting hanky-panky, you are our watchdog. What’s happening?
Elizabeth MacDonald, Senior Editor: The issue has to do with stock options. We know that a lot of Silicon Valley (search) and high-tech companies have issued stock options, but what a lot of investors don’t know is that these companies also get, as all companies do, a tax refund. In other words, the get to deduct the run up in the price of the stock option against...
David Asman: So what do they do with that tax refund?
Elizabeth MacDonald: They stick it right in cash flow, and it’s been boosting by astronomical amounts.
David Asman: So they’re allegedly misleading the public to thinking that a tax refund is actually profit?
Elizabeth MacDonald: Right. Off of the products and the co-operations of their businesses, but it’s not. We have Microsoft (MSFT), 24 percent over a three-year period boost to cash flow from this tax refund check, for their stock option gains. It’s pretty big. Other companies you should watch out for include Yahoo! (YHOO), Siebel Systems (SEBL), Cisco Systems (CSCO), and Sun Microsystems (SUNW).
Quentin Hardy, Silicon Valley Bureau Chief: They’ve been doing this for years, right Liz?
Elizabeth MacDonald: They’ve been doing it for years.
David Asman: And it’s not illegal?
Elizabeth MacDonald: No, it’s not illegal. The fact is that they can’t deduct the compensation expense on the shareholder reports, they don’t have to right now.
David Asman: Now, I own some of those stocks. Should we all dump stock in these companies?
Elizabeth MacDonald: I think you should be a little worried if the cash flow is relying too heavily on tax refund checks.
David Asman: Quentin, I want to hear about the cover story on Hewlett-Packard (HPQ), tell us what the news is there.
Quentin Hardy: Well, look, I think these guys really deserve a victory lap. Everybody said they couldn’t pull this merger with Compaq off, they got costs down a billion dollars more than they said, a year ahead of schedule. The thing is operating as one, single company now. It’s very coherent; it’s very tight. And now they say they’re going to take on IBM (IBM), you know I really wouldn’t discount them.
David Asman: Now, the CEO, Carly Fiorina, beat the odds-makers. When they went after Compaq, everyone said ‘big mistake,’ but she beat them.
Quentin Hardy: She took a world of heat, she took on the founder’s son, she beat them all back, and she proved that she was right.
Mike Ozanian, Senior Editor: You know, in the computer industry, the margins are shrinking, but I like H-P, because I think that Carly [Fiorina] is going to be the Sandy Weill [chairman and CEO of Citigroup (C)] of the PC industry. She’s going to grow that company by buying other companies and then consolidating, and then firing some people.
David Asman: And, Elizabeth, what do the numbers look like?
Elizabeth MacDonald: I was, admittedly, worried and nervous about this merger, but Quentin, what are the numbers of the cost-cutting so far, and where is the cost-cutting at right now with the merger?