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Commentary > The Bottom Line
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Is Microsoft even worse than we thought?
The SEC says the company downplayed its dominance.
May 31, 2002: 2:26 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist

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PALO ALTO, Calif. - This column was published on May 30 and updated May 31.

So it turns out that the Feds believe Microsoft, like so many other companies, has been managing its earnings.

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On Friday, the Securities and Exchange Commission reportedly came to a settlement with Microsoft under which the software powerhouse will acknowledge the accounting no-nos it has committed, stop misbehaving, and promise to play nice in the future. (see more on the settlement.)

What makes this case so different, of course, is that Microsoft (MSFT: down $0.06 to $52.58, Research, Estimates) wasn't allegedly trying to inflate its results. According to the published accounts of the SEC's investigation -- and according to conventional wisdom on Wall Street since the mid-1990s -- Microsoft was trying to downplay its earnings. If other companies attempted to take cookies out of the jar to deposit on their bottom line (think: Network Associates under ex-CEO Bill Larson), Microsoft stands accused of dropping cookies into the jar for consumption at a later snack time.

  graphic  See the news story  
  
Microsoft talks settlement
  

Why in the world would a company try to make its earnings look worse than they really are? Well, when you're a monopoly, churning out what some anti-capitalists believe are obscene earnings year after year, you just might find it in your best interests to hold back a bit.

There'd be a particularly acute desire to play down success when government lawyers are crawling all over your operations to prove your monopoly power is harming other companies.

Then there's the issue of "smoothing" out performance. Jack Welch perfected the trick at General Electric. John Chambers at Cisco once had a knack for beating analyst estimates by a penny per quarter -- a function of managing Wall Street's expectations as much as anything else. If a big company like Microsoft knows PC growth is slowing, it'd certainly make sense to plan financially for a rainy day, assuming that option were open to it


"sandbag" (transitive verb): to conceal or misrepresent one's true position, potential, or intent especially in order to take advantage of


Bully for the SEC for trying to get all companies to be more straightforward about how they communicate results. But good luck stopping the practice. At issue here is far more than accounting. It's more about sandbagging, a helpful definition of which appears above, courtesy of Merriam-Webster's www.m-w.com Web site. There are all sorts of situations where business people sandbag.

When subordinates sandbag their superiors, it's called under promising and over delivering, and it's applauded. When negotiators sandbag on their intentions, it's called trying to get the best deal, and it's also to be applauded. It's when sandbagging equals lying that the legal system kicks in.

  graphic  RECENTLY BY ADAM LASHINSKY  
  
Telling tech's future
Pricey stocks just got pricier
Schwab gets an E for effort
  

An investor's job is to read through the sandbagging -- or, conversely, the over hyping -- to get a true sense of a company's worth. The SEC and other agencies can help. But only so much.

It's worth noting that Microsoft's stock is up today. Up because the market likes resolutions of outstanding litigation? Up because there's no other news? Up because trading volume is lighter than usual? Take your pick.


Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at adam_lashinsky@timeinc.com.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.