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    Highlights for week ending July 20, 2002
  • Annex Research: Analysis of IBM Second Quarter Business Results. Ban IBM Hoarse Whisperers! Managing Wall Street Analyst Perceptions Is an Area of IBM Excellence. Excerpts: "The art of good investor relations? That’s one way of looking at it. Incestuous self-dealing is another. Especially when you throw in the $1.8 billion IBM spent in the second quarter lining Wall Street’s pockets with stock buybacks ($47.6 billion since 1995 - see the chart). Never mind that this and the $2.1 billion pretax write-offs contributed to a $2.8 billion negative cashflow in the first half of the year. Graduates of There-Is-a-Sucker-Born-Every-Day School of Thought don’t concern themselves with such details."

  • The Street: A (Kitchen) Sinking Feeling at IBM. Excerpts: "Due to this very sort of noise in IBM earnings, investors also need to look at cash-flow measures. But the company gives no useful cash-flow figures in its earnings release. The cash flow data in the second-quarter release for the first half don't track at all with cash-flow statements included in the first-quarter Securities and Exchange Commission filing. As a result, it's impossible to update Detox's free cash-flow analysis of IBM. IBM's stock is more than 40% below its 52-week high because investors are worried about earnings power at Big Blue. In light of nearly opaque earnings releases like this, it's no wonder."

  • CBS MarketWatch: IBM: A Big Blue sea of confusion. Excerpts: "The other says Big Blue is a battered champion that seems to be concealing its wounds, in part, with rope-a-dope-like accounting trickery. They fear that future profit growth will falter, as the company can no longer rely on its overfunded pension plan, a lower-than-average tax rate, and other factors that helped IBM post double-digit earnings growth in recent years, based on paltry single-digit sales gains." ... "Analysts have increasingly questioned how a company that seemingly missed out on the tech boom by reporting double-digit sales growth in only one quarter since 1995 could manage to consistently meet its lofty income goals. IBM's numbers appear to be facing more skepticism than ever - even than when the company seemed to be on the road to bankruptcy in the mid'90s, or when the company faced a federal antitrust suit in the '80s."

  • John Dvorak, PC Magazine: Is IBM Toast? Excerpt: "On April Fools' Day, 1993, the IBM board of directors put Lou Gerstner in charge of the company. Since then, IBM stock has skyrocketed, and Gerstner pocketed millions of dollars as a thank-you. According to IBM watcher Bob Djurdjevic of the Annex Bulletin, IBM's growth rate under Gerstner was the worst in IBM history, at 3.2 percent, compared with the 4.3 percent growth rate under John Akers."

  • There will be an informational meeting in the RTP area, July 25, 5:30 pm, at the Holiday Inn Raleigh-Durham Airport, Executive Board Room, 4810 Page Road. All employees and retirees are invited to attend. I will be there, with Jimmy Tarlau from CWA, to talk about what the Alliance is all about, and answer any questions. By Linda Guyer.

  • Linda Guyer comments that "We are in a phase right now where it is difficult for most IBMer's to believe they won't be 'taken care of'. Excerpt: "In spite of the change in management with Lou Gerstner, many employees continue to believe they are 'safe'. They think that their loyalty, or their important skills, or both, will be recognized and will save them. I can tell you that personally I have seen '1' rated employees laid off because some project was canceled and the entire department was let go."

  • "LarryP315" provides an easy-to-understand explanation for how companies such as IBM use (or misuse) projected pension plan earnings to smooth earnings.

  • Canopus Research, William F. Zachmann: IBM's Bad News. Excerpt: "The past few quarters of 'stealth layoffs' at IBM (under Gerstner and continuing under Palmisano) have actually exacerbated the problem for obvious reasons. Small across the board reductions ("deaths of a thousand cuts") are mandated top-down for various business units. Decisions about how to get the reductions demanded are pushed down to lower and lower levels of the bureaucracy -- with the end result that who gets cut most are the worker bees, not the managers. So an organization already top-heavy with management bureaucracy ends up, after each round of stealth layoffs, even more top-heavy, more bureaucratic, hence proportionally with even more corporate overhead, than before. This is one of the primary reasons why IBM Global Services (IGS) is no salvation for IBM. IGS is (and will soon show itself to be) an Albatross around IBM's neck! The IBM corporate overhead burden alone is sufficient to make IGS one of the highest cost producers of IT services on the planet. It is already one of IBM's lowest margin (albeit fastest growing) businesses. It is, therefore, necessarily, one of the highest priced (if not the highest priced) providers of IT services in the market. And it is not really any better at it than lots of much leaner, lower cost, lower priced, competitors."

  • USA Today, by Christine Dugas: Retirement crisis looms as many come up short. Excerpts: "The broken contract: It wasn't supposed to be like this. For years, there was an implicit social contract: If you worked hard for a company, you'd be rewarded with financial security in retirement. Of course, there were always gaps in the traditional pension system, which mostly covered workers at large manufacturing companies. But today the social contract is on shakier ground than ever, many experts say. 'It's an untold secret,' says Karen Ferguson, director of the Pension Rights Center. 'You can work a lifetime and do everything right and not be able to pay your bills in retirement.'
    "

  • InfoWorld Survival Guide: The IT rust belt by Bob Lewis. Excerpts "OF ALL THE requests for advice I receive, the hardest come either from college graduates and career changers wanting to know how to break into IT or from older programmers who want to write code until they retire but can't even get an interview. They've been sold on the idea that proficiency with computers practically guarantees employment. Now, nobody wants 'em. I'd love to offer hope and great advice. Regrettably, the best advice I have is this: Find a different field of endeavor. Unless you're in the top rank, there's little future for you in IT."

  • A retired IBMer describes how he is able to obtain prescription drugs in Canada for less than they cost through his IBM retirement medical plan.

This week on the Alliance@IBM Site:

 

Articles about corporate malfeasance:

  • Los Angeles Times: Sweet for Execs, Sweat for Others. Corrupt firms have coasted as employees sank. Excerpt: " As a former Dilbertina in corporate America, it seems to me that something important is missing in the current efforts to diagnose and treat a very bad case of corruption. The malady is not limited to "a few bad apples," nor will it yield to new regulations, important as they are. The infection is systemic, reflecting a 20-year change in corporate culture that converted full-time employees to temporary workers, all but eliminated corporate investment in communities and gutted strong companies to "maximize shareholder value." The resulting, and temporary, increases in stock prices and reductions in operating costs (at the expense of employees) fueled an obscene rise in executive salaries.

    Employees and communities were the immediate losers in the new corporations. Now we see that shareholders can also lose. Employees once were valued members of a corporate family. They worked an eight-hour day and were paid a fair salary that included a company-paid pension plan and decent medical-dental insurance. They may also have had a 401(k), or one of its predecessors, but this was not a replacement for a traditional pension. In return, most employees willingly gave their best efforts and loyalty. Shareholders received a regular return on investment in the form of dividends. They didn't have to sell their stock for immediate return and could endure the normal ups and downs of the business cycle, knowing that good companies invested for the future. Both employees and investors were usually in for the long term."

    It is no wonder that today's corporations do not value "older" workers. They> know too much. Attention, young people: In the 1930s, people died to establish the eight-hour workday, and until recent years it was the norm. There is something wrong when today's children are fed packaged dinners by a nanny and parents eat remnants while standing over the sink at 10 p.m. Employers know this If link is broken, view Adobe Acrobat version [PDF--58 KB].

  • Business Week: Inside McKinsey. Enron isn't its only client to melt down. Suddenly, times are trying for the world's most prestigious consultant.
  • New York Times editorial by Kate Jennings: The Hypocrisy of Wall Street Culture. Excerpts: "...When I crossed the thresholds of those downtown skyscrapers, I went from a one-person, one-vote democracy — messy, noisy, infuriating, but democratic — to a netherworld where fear was the primary management tool and dossiers, censorship, misinformation and various forms of surveillance were standard practice. To me, corporations seemed not merely autocratic but totalitarian; the engines of America's fabled democratic society are anything but." ... "Executives not only routinely ignore their employees, they appease the market whenever necessary by firing large quantities of them — all done with impunity. It was not until the events of the last months, however, that many shareholders became aware of the extent to which they, too, are but pawns in management's game. They didn't have to lose their portfolios and pensions to learn this, because there has long been one dead giveaway of corporate disdain for shareholders: All over the United States, when the season arrives for annual shareholder meetings, corporations convene them in out-of-the-way places to dissuade shareholders from attending and asking pesky questions." ... "The savings of many in the hands of one." — Eugene Debs. If link is broken, view Adobe Acrobat version [PDF--16 KB].

  • Washington Post editorial by Sebastion Mallaby: Too Soft on Stock Options... Excerpt: "It's sometimes said that executive stock options would be fine -- almost patriotic -- if only they were properly disclosed in corporate accounts. After all, options reward executives for great performance, and what could be more American than that? This is a bit naive, unfortunately. Options, at least as they exist currently, do not reward performance. And their accounting cover-up is not incidental -- it is central to the real goal of many options schemes, which is to disguise bosses' absurd pay from the rest of us."

  • MS-NBC editorial: The Senate bill misses the point. Congress ducked the key accounting issue by not barring the gimmick of treating stock options as ‘assets’. Excerpt: "It’s been thrilling to watch the Congress rush around like a bunch of meth-crazed CPAs at the “accounting outrages” that have seemingly laid waste to America business. But it’s hard to have much confidence that anything of lasting value will come of it when you consider what transpired in Washington on Monday." ... "As a public relations stunt, the bill seems to have done its job, and there has not been a commentator anywhere who has failed to praise it for its “tough-minded” response to the “crisis of confidence” that is said to be gripping the market. But frankly, folks, it’s all just baloney. Not only was the bill filled with marginal “fixes” like the creation of an accounting standards oversight board, and the requirement that corporate loans to officers be publicly disclosed within seven days, but most disturbing of all, it did nothing whatsoever to address the one thing that really is a big problem: the special and favored treatment of executive stock options."

  • New York Times editorial by Kevin Phillips: The Cycles of Financial Scandal. Excerpts: "The effects have been profoundly inegalitarian — and not just in the loss of manufacturing's blue-collar middle class. In the last two decades, as money shifted from savings accounts into mutual funds, promoting the stock markets and the money culture, corporate executives became preoccupied with stock options, compensation packages and golden parachutes. "More" became the byword. In the new management handbook as rewritten by finance, the concerns of employees, shareholders and even communities could be jettisoned to raise stock prices. Major companies could make (or fake) larger profits by financial devices: writing futures contracts, investing in stocks, juggling pension funds, moving low-return assets into separate partnerships and substituting stock options for salary expenses. Enron was only the well-publicized tip of a large iceberg."

  • Slate editorial by Daniel Gross: Give that CEO a pay raise! How an attempt to cap executive salaries a decade ago inadvertently led to the corporate mess plaguing us today.

  • Molly Ivins: Who're you calling 'we'? Newsflash: Everybody wasn't a 1990s daytrader. Excerpts: "Sure people were gettin' rich. It just wasn't us. Go back and look at the numbers—astonishing increase in wealth, almost all of it going to the top, the richest rich people got all of it. Only at the very height of the Clinton boom did the working class finally budge back to where it was in the late 1970s." ... "I can name for you the honor roll of people who regularly raised hell about this very thing in the '90s—we were not "oblivious" -- and we raised hell about exactly the structural, regulatory flaws that have now proved to be so disastrous. 'We' are not in the greedhead class. 'We' are not the CEOs who increased their pay from 85 times what the average worker made in 1990 to 531 times what the average worker made in 2000. Over half of us still have no stake at all in the stock market, so be careful with your 'everybody.' And many of 'us' who do have a stake in the stock market are not day-traders or people who know dog about NASDAQ or any damn thing about the New Economy—which someone, not 'us,' kept claiming was a perpetual motion machine. 'We' wound up in the stock market only because 'we' were encouraged to put our savings into these 401Ks, and that's all 'we' know about any of it. Take your 'we' and shove it."

  • New York Times editorial (written by Robert Hemsley, a blue-collar worker in Everett, Washington): Losing My Stake in the Economy. Excerpt: "Two decades ago, C.E.O.'s were paid about 40 times more than the average hourly employee; now they make more than 500 times the wage of the average hourly employee. Last year the C.E.O. of my company made 592 times more than I did. I wonder if that makes me underpaid or the C.E.O. overpaid. Recently management told hourly employees at my mill to make concessions or risk losing our jobs. We made the concessions last autumn, but last spring the C.E.O. received a stock "gift" worth $1.4 million. This isn't capitalism, it's avarice. I am not naïve. I know about the robber barons of the late 19th century and others throughout history who have abused the system. But never has the gap between executives and employees been greater. This disparity threatens the capitalist system itself. When employees make concessions while executives take bonuses, the bonds of common purpose are broken." If link is broken, view Adobe Acrobat version [PDF--32 KB].

  • Motley Fool: Are We Angry Yet? You Bet. Excerpt: "If they want to pay executives millions of dollars, and the shareholders approve, well, by all means, they should. But as an individual investor, I find the arguments against stock options accounting so disingenuous that I can't understand how people don't see them for what they are: self-interested ways to give insiders enormous pay packages without disclosing the effect to shareholders. Seriously, these options are worth billions to those who receive them. Not expensing them treats the options as if they've come out of thin air. Someone bears a cost, and that cost should be represented. That someone is the existing shareholder."

  • New York Times: Tighter Rules for Options Fall Victim to Lobbying. Excerpt: "For all the talk of corporate scandal, one leading proposal for change — tightening the rules on stock options — was brushed aside in Congress this week, thanks in part to a powerful business lobbying coalition that has long fought to protect these rich pay packages. Long before the current wave of scandals, business interests have successfully protected stock options from attack in Congress. But last September, an umbrella group calling itself the Stock Option Coalition was formed from high-technology companies, executives of Fortune 500 companies, venture capitalists, biotechnology companies and the Nasdaq market — all sending out platoons of lobbyists, conducting sophisticated e-mail campaigns and reminding Congress of their hefty campaign contributions."

  • Annex Bulletin: Sir Lou OutLayed Lay! Excerpt: "Since the start of the IBM insider selling spree in late 1996, Gerstner has disposed of nearly half a billion dollars’ worth of IBM shares (about $424 million) for an estimated pretax profit of about $345 million."
"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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