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A SPECIAL ANNEX NEWSFLASH

SEC Investigating Some IBM Accounting Practices

A Paler Shade of Blue

A Tempest in a Tea Pot, Or a Tip of the Iceberg?

PHOENIX, June 2 - IBM disclosed after the markets closed today that the Securities and Exchange Commission (SEC) is investigating some of its accounting practices, specifically the retail revenue recognition in the IBM PC unit.  Of course, IBM spokesman disclaimed any Big Blue culpability.  Nevertheless, the stock dropped more than two points in after-hours trading.  And it is still dropping as we write this.

Of course, it all may turn out to be a tempest in a tea pot.  At least in this specific instance.  But there have been many other questionable accounting practices that have emerged during Lou Gerstner's tenure at the helm (1993-2002) that have pushed the edge of legality and propriety.  Once the SEC accounting "houndogs" start sniffing inside IBM's books, there is no telling where the scent may take them.  The current investigation could only be only a tip of the iceberg.

A quick search of our web site alone, for example, revealed no less than 50 articles on Big Blue's "financial engineering" schemes in the last few years that had rendered a formerly pristine "true blue" company a paler shade of blue (see a selection of those referenced below).

To his credit, one of the first things that Gerstner's successor as CEO Sam Palmisano addressed and reversed were some such questionable practices (such as accounting of intellectual property revenue, stock buybacks, and tax rate-related issues - click here to read our May 1992 story).  But it may take a lot more than that to restore Big Blue's current, paler shade of blue to its original pristine color.

Happy bargain hunting!

Bob Djurdjevic

For some Annex Research reports on IBM's "financial engineering," check out... 

Armonk's Fudge Factory (Apr. 9, 1999)
... restated. We've said before that IBM has turned financial engineering
into a new line of business (see Annex Bulletin 97-30, 7/21/97).
..  

Sam Is No "Change Agent" (May 6, 2002)
|Annex Research | Annex Bulletins | Quotes | Workshop | Feedback | Clips | Activism
| Columns The copyright-protected information contained in the ANNEX ...

A Big Blue Red Herring (Feb 15, 2001)
... And that's why we think the JDS sale is a small fry story; that would-be investigators
of IBM's accounting practices, of "financial engineering" as we have ...

IBM 5-year Forecast (June 19, 2001)
... tax reductions, or the milking of the IBM pension fund, which we jointly dubbed
several years ago as Big Blue’s new “financial engineering” line of ...

Big Blue Starting to Unravel (Apr 8, 2002)
... a “Grand Slam-Dunk of Bunk!”. We also warned at the time about
IBM’s “financial engineering:”. Unless, of course, the Big ...

SEC/Pitt on Stock Option Scams (Apr 5, 2002)
... [For more details on "financial engineering" -- a new IBM line of business,
as we put it back in 1997 -- see "Big Blue Starting to Unravel," (Apr. ...

Poughkeepsie Journal re. IBM/SEC (Feb 21, 2001)
... firm Annex Research in Phoenix, said the inclusion of pension fund surplus on the
earnings line is another form of ''financial engineering'' that generates ...

"Lou's Lair vs. Bill's Loft" (June 28, 1999)
... companies. At "Lou's Lair," financial engineering and Greed are kings;
at "Bill's Loft," software engineering and Profit rule. Furthermore ...

Annex Bulletin - 98-36 ("Solid Quarter...")
... record territory by increased earnings and equity, but by its $23 billion-and-counting
stock buyback program, plus other "financial engineering" feats, such as ...

Analysis of IBM's 3Q00 Results (Oct 18, 2000)
... Gerstner’s IBM wouldn’t be IBM - the financial engineering company, if it didn’t
try to slip a few fast ones by Wall Street analysts while putting a ...

Fortune on IBM (June 15, 2000)
... Including Armonk’s questionable, if not fraudulent, “financial engineering
endeavors, such as the use of its pension fund to prop up profits. ...

Analysis of IBM CEO Change (Jan 29, 2002)
... some more, if the current post-Enron atmosphere of accounting vigilance leads to
additional scrutiny of Gerstner’s “financial engineering” endeavors over ...

IBM Board Authorizes Additional Stock Buybacks, Poughkeepsie ...
... Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996) etc.].
Or just click on and use "financial engineering" as keywords. ...

IBM Credit Corp. First Half 2000 Results (Sep. 8, 2000)
... So it gullibly fell for yet another rabbit that Armonk pulled out of its hat,
using financial engineering and smoke and mirrors to mask its poor business ...

Analysis of IBM 4Q01 Results (Jan 18, 2002)
... Of course, you’ve been hearing us point out for over five years now that “financial
engineering” has been the only new line of business the Gerstner ...

Press Clips
... So now one team designs microprocessors for both machines. Eventually, buybacks start
to look less shrewd financial engineering than a failure of imagination. ...

Fortune on IBM (June 15, 2000)
... Our warnings about Gerstner’s “Le Big Bleu” trying to create an illusion
of prosperity by means of financial engineering, rather than by growing its ...

Justice Dept May Be Probing Wall Street Analysts (Apr 23, 2002)
... magazine October 1998 column, "Wall Street Boom; Main Street Doom" etc.].
Or just click on and use "financial engineering" as keywords. ...

EDS CEO Replaced (Mar 20, 2003)
... 28, 2000), Annex Bulletin - 2000-02 (EDS' e-Price Clubs). Or just
click on and use "financial engineering" or similar keywords. 

"Lou's Lair vs. Bill's Loft" (June 28, 1999)
... companies. At "Lou's Lair," financial engineering and Greed are kings;
at "Bill's Loft," software engineering and Profit rule. Furthermore ...

"Big Blue Sings Y2K Blues" - 99-32 (Oct. 21, 1999)
... As a result, IBM stock soared, mostly thanks to its "financial engineering" line
of business, such as the $30 billion of stock buybacks, for which Armonk ...

ICC: More Armonk "Fudge" (May 28, 1999)
... Is IBM Cheating on Taxes? So what is all this about? It could be about lower
taxes. And the so-called "financial engineering" to facilitate them. ...

Salomon/Gurfeund casino comment (June 21, 2002)
... 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994) etc.]. Or just
click on and use "financial engineering" or similar keywords. ...

IBM Small and Medium Business Initiative Update (Jan 29, 2003)
... 1991), Industry Stratification Trend (Mar. 30, 1990), etc.]. Or just
click on and use "financial engineering" or similar keywords. ...

IBM Second Quarter Charge (May 23, 2002)
... Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994) etc.].
Or just click on and use "financial engineering" as keywords. ...

Analysis of 2000-2001 Insider Trading (Apr 1, 2002)
... 17, 2002). [For more details on "financial engineering" -- a new IBM line of business,
as we put it back in 1997 -- see "Big Blue Starting to Unravel," (Apr. ...

For additional Annex Research reports on IBM, check out... 

2003: “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), “Start of a Real Turnaround?” (Jan 17).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), "Half or Double Trouble?" (Aug 12), Wall Street/Main Street Chasm (June 25), “Wall Street Casino,” (June 21), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use appropriate  keywords.

 






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Volume XIX, Annex Newsflash No. 2003-08
June 2, 2003

Editor: Bob Djurdjevic
Published by Annex Research, Inc.
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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