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    Highlights for week ending February 9, 2002
  • Fortune: That Old Financial Magic. Excerpts: "'Revenues light but earnings comes in fine,' wrote Bear Stearns analyst Andy Neff on Jan. 17 when IBM announced its 2001 financial results. Neff's words evoke the biggest criticism of Gerstner's regime: Given that revenues have grown less than 5% annually since 1994, Big Blue's nearly 20%-a-year earnings growth during that time is a product of financial engineering, pure and simple." The gap between revenue growth and earnings growth has become even wider in recent years; in 1999's fourth quarter IBM reported revenues of $24.2 billion and earnings of $1.12 a share. In 2001's fourth quarter, IBM reported sharply lower revenues--$22.8 billion--but sharply higher earnings: $1.33 a share.

    Until recently nobody on Wall Street much cared how IBM produced its earnings--a big reason the stock has gone up more than eightfold during Gerstner's tenure. But as accounting practices have come under scrutiny, IBM has taken a hit. Since Jan. 17, the stock has slipped from nearly $120 a share to $108. The key questions: How big an issue are IBM's less than squeaky-clean earnings? And can Palmisano continue to play the game?

    IBM's best-known tricks for generating earnings growth--share buybacks and a reliance on earnings that are a result of its overfunded pension plan--are fairly easy to understand. There's nothing inherently wrong with either of those--or with IBM's success at managing down its tax rate, another earnings enhancer. The issue is more the scale of such activity. For instance, from 1995 through 2001, IBM spent around $44 billion buying back shares, a move that enables a company to report higher earnings per share because there are fewer shares. That sum is only a hair less than the company's total net income of $45.5 billion during the same period. Longtime critics like Grant's Interest Rate Observer contend that there must be better uses for the cash than creating the illusion of growth, and that IBM is engaging in a "slow-mo LBO." If link is broken, view Adobe Acrobat version [PDF--29 KB].

  • Congressman Bernie Sanders Press Release: Corporate Greed. Excerpts: (Referring to Enron) "A major corporation went bankrupt, in the process laying off a large percentage of its workers. Workers' pensions were under assault—while executives bailed out of company stock at a huge profit. Executives hid losses and inflated profit reports with the full blessing of the firm’s outside auditors. Lawyers 'investigated' reports of wrongdoing—and found nothing wrong. The moral of this sad story is greed. Everything that happened took place because someone—executives, accountants, investment bankers, lawyers—wanted to make as much money as possible as fast as possible."

    "Corporate greed doesn’t end with Enron or the pharmaceutical companies. It is endemic. Take, for another example, IBM. Big Blue recently announced a new round of layoffs. But that doesn’t mean the company is contracting. While the company has cut more than 5,000 jobs in the United States since July, IBM is building two new micro-processing plants in China. In China, of course, workers are paid a fraction of what American workers receive—sometimes as little as 20 cents a day."

    "But then, IBM’s executives are so driven by greed that they ignore the plight of American workers. Two years ago, despite record-breaking profits and a pension fund surplus of some $10 billion, IBM slashed pension and retirement health benefits for workers and curtailed their salaries. Since cutting pensions and worker salaries means more for IBM CEO Louis Gerstner, then it must be good corporate policy. In fact, Gerstner raked in $176 million in total compensation and stock options over the past two years, and that does not count his $260 million in unexercised stock options from IBM during his tenure as CEO. (Just in case he doesn’t have enough for his senior years, Gerstner negotiated a retirement plan over $1.1 million a year for himself as a 'reward' for slashing the pension plans of IBM employees.)"

  • Poughkeepsie (N.Y.) Journal: IBM makes 3rd job cut since November. Excerpt: "IBM Corp. calls it "resource actions.'' Some employees call it ''stealth layoffs.'' Another one came Wednesday, with 100 people given notices in the Server Group, about a third of them at the Poughkeepsie site." ... ''IBM isn't making their numbers and they're downsizing people, and they're trying to do it as quietly as possible,'' said Will Zachmann, president of Canopus Research in Duxbury, Mass. If link is broken, view Adobe Acrobat version [PDF--79 KB].

  • USA Today: Employees' new motto: Trust no one. Excerpts: "After being laid off six months ago from his job as a product manager at a telecom firm, Tim Kusner has been looking for a new employer. But this time, he's looking for more than good pay and promotional opportunities. He looking for a company he can trust. The Enron scandal is eroding the faith that workers place in our nation's business institutions. People who had never heard of the energy giant before it collapsed are suddenly looking at their own employers and wondering whether they could face similar risks.

    Layoffs have already shattered employees' sense of security. Arthur Andersen has admitted to destroying auditing records. And dozens of companies — from Polaroid to IBM to Cisco Systems — have canceled severance, halted health benefits, withdrawn job offers, changed pension plans or issued misleading audit reports."

  • "chas06033" compares his IBM retirement medical benefits with those of his friends. Excerpt: "I have talked to many retired friends of different companies to see if their medical retirement benefits were similar to ours. It all cases, mine (ours) was the worst. I have discussed my IBM Self Managed Plan 20 (IBM's best) with my doctors and other medical supply providers, and they say it is the worst one they have seen, even without telling them how much I have to pay IBM to get it."
  • CBS News: Did Enron Steal From Employees? Excerpts: "The big accusation against Enron has been its use of shady partnerships to hide its debt. But now, reports CBS News Correspondent Sharyl Attkisson, a new charge has emerged: a former senior accountant has come forward to accuse the company of taking large sums money from worker benefits. It's a charge that could lead to a criminal case. "The money that comes out of benefits accounts that is not directly to pay for employee benefits is illegal," said former Enron senior benefits specialist Robin Hosea. Hosea was hired as Enron's senior benefits accountant in 2000 and immediately noticed that employee benefits money was being spent by other departments at Enron — without the benefits department's approval."

  • USA Today: Enron's dive destroys workers' pensions. Excerpt: "What happened with Enron from 1987 through 1994 runs counter to the basic concept of an employer-funded pension, says Norman Stein, a University of Alabama law professor who specializes in pension issues. ''It makes a mockery of the certainty and predictability in defined-benefit pension plans,'' he says."

  • New York Times: Pension Chiefs Want Head of the S.E.C. to Withdraw. Excerpt: "'One of the people who lobbied the hardest against auditor independence is now the chairman of the S.E.C.,' a lawyer for the New Hampshire Retirement System, Alan Cleveland, said. 'Now two of the five commissioners will be from the industry. No more will the accounting industry have to do end runs around the S.E.C. They will be the S.E.C.'"
"The test of our progress is not whether we add more to the abundance of those who have too much; it is whether we provide enough for those who have too little." — Franklin D. Roosevelt
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