Bonum Certa Men Certa

Is Novell's Pal Cooking the Books as Well? (Microsoft)

Microsoft's taxation loopholes and system abuse; financial woes

A couple of weeks ago we pointed out that Novell is cooking the books, i.e. it moves money between buckets in order to embellish its results. It didn't work out too well.

There are rarely truths and more often we are blinded spin when it comes to big corporations. Microsoft is no exception. This post is intended to show that:

  1. Financially, Microsoft does not do as well as its media will have you believe
  2. Financial misconduct at Microsoft is quite routine


Several days ago, Microsoft declared its quarterly dividend.

Microsoft Corp. today announced that its board of directors declared a quarterly dividend of $0.11 per share. The dividend is payable March 13, 2008 to shareholders of record on February 21, 2008. The ex-dividend date will be February 19, 2008.


Tax Evasion and Deception



On the very same day, the Associated Press published an article about a Wisconsin bill that would address some tax loopholes.

Wisconsin Bill Would Require More Reporting on Tax Loopholes

[...]

A message left with Microsoft was not immediately returned.


We mentioned the Gates Foundation and gave some detailed information a couple of times in the past, or at least alluded to it. It is worth repeating and re-qoting the analysis of the Gates and Buffet Foundation "Shell Game".

My background is finance and accounting. As a socially conscious venture capitalist and philanthropist, I have a very good understanding of wealth management and philanthropy. I started my career in 1967 with the IRS as a specialist in taxation covering many areas of the tax law including the so-called legal loopholes to charitable giving.

[...]

However, the Gates Buffet foundation grant is nothing more than a shell game in which control of assets for both Gates and Buffet remain the same.

[...]

The only difference is that the accumulation of wealth by these two will be much more massive because they will no longer have to pay any taxes.


This is seen as acceptable by some, but it's rather obvious who loses the most . Itgoes well beyond the Foundation. Below we present two incident from the past few months alone:

1. Ecuador Tax Agency Closes Microsoft Branch Offices For 7 Days

"We have twice requested balances, payment reports and complete tax information, but the company hasn't given it to us, so in accordance with our laws we have proceeded with the closure," the SRI official in charge of the proceeding said.


2. Microsoft Office raid in Hungary

"Such behavior could lead to the exclusion of competitive products from the market and violate European Union rules, according to the authority known as the GVH."


The example above is less to do with tax; it's more about other types of practices. Other companies that came under fire for their financial practices recently inlcude Apple (Steve Jobs accused of turning a blind eye to predating) and Cisco in Brasil (massive case of tax evasion). Microsoft hasn't escaped scrutiny though. Consider this article [expired]:

Microsoft's past stock options practice poses questions



[...]

Microsoft in 1999 announced that it would end a policy of awarding options at monthly lows and said it would take a $217 million charge, though many details of that discontinued practice haven't been widely known, The Wall Street Journal said Friday.

Those details raise questions about how Microsoft began the practice, what prompted the company to end it and whether the way the options were dated--at 30-day lows the month after they were granted--influenced other companies, it said.


Tough Life Where Cash Cows Are Absent



”Everywhere you look other than Windows and Office, business for Microsoft has been very tough.“Microsoft makes obscene amounts of money through sales of: (1) Windows (the consumer rarely has a choice); (2) support contracts; and (3) Office. The latter explains why the company has resorted to corruption in defending something which Microsoft says is a simple matter of its commercial interests, namely OOXML.

Everywhere you look other than Windows and Office, business for Microsoft has been very tough. Legal expenses -- incurred due to retaliation for anticompetitive practices -- have been huge (exceeding a billion dollars per year). Now, consider Windows Mobile.

Microsoft Hides Its Mobile and Business Apps Divisions

The company is folding its two worst-performing divisions -- Microsoft Business Solutions (its business applications unit) and its Mobile and Embedded units -- into the Microsoft Business Division and Microsoft Home and Entertainment units, respectively.


There are some more examples of this here:

The Secret Failures of Microsoft

There is no choice involved; even most Linux users are forced to pay for a Microsoft license in order to obtain a brand name PC.

[...]

They are bound to an oath to swear allegiance to Windows XP Professional and must never mention Linux and Windows in the same breath. If they step out of line in any way, Microsoft dramatically raises their OEM licensing fees and sends them to indoctrination camp, where they face chairs being hurled at them by angry monkeys.

[...]

Why do Windows enthusiasts exibit much hostility to an obvious fact? Because if they admit that 80% of the company's revenues come entirely from an OEM tax, and not from any choice on the part of consumers...

[...]

Microsoft's decade of investments in WinCE and Windows Mobile Smartphones have only barely matched the market share of Palm, which itself is a run down company out of ideas. Microsoft couldn't out-maneuver the incompetent Palm within a decade of trying; now both are ineffectually fighting over the dying PDA industry while Linux and Symbian slaughter them in the smartphone arena...


Remember the XBox 360, which has already lost several billion of dollars rather than make money? Consider for example:

1. How Much is Too Much

Microsoft says it will stick with Xbox. But with years of heavy losses behind it, the pressure's on for the gaming division to make good


2. Microsoft stoic despite massive losses

If you were to judge by the PR rhetoric, you'd think the 360 was an unstoppable commercial juggernaut. As usual though, PR lies.


3. Loot: Redmond, We Have a Problem, Or, What's Wrong With the Xbox 360

At this point, Former becomes impassioned. That's not fair, he says; we always saw this as a long-term venture. To which we reply that we were talking about the original Xbox, and while other divisions of the company throw off more profits in a single quarter than the entire $5 billion or so lost in the home and entertainment division to date, the fact remains that, as we take-our-word-for-it predicted, the Xbox group has been spectacularly unprofitable for Microsoft. Hence, our heretofore unpublished Vietnam analogy. The rest of the night is a blur, but we digress.

[...]

The worst case scenario for Microsoft, then, is one in which the Xbox 360's bid for the mass market is blocked by the Wii for the next two to three years, at which point the aging and underpowered Wii gives way to a cheaper-than-it-is-now PS3 with a selection of AAA titles that's far wider than what the PS3 has at the moment; new installments of Playstation's own popular and casual-leaning games; and a slew of new franchises from Sony's much-larger studio operation.


Of course, some of these colossal losses can be compensated for by sales of Windows and Office (among a few other profitable products).

Looking a year back, Microsoft's relied on Windows Vista to save its day, but a major magazine has just named Vista the #1 tech disappointment of 2007. It's hardly surprising and it's also the cause for aggressive attacks against GNU/Linux and Free software. Here are some of these year-old articles, which also spoke about the company's buybacks -- a sign of great weakness:

1. Microsoft counts on Vista to recharge stagnant stock

There was a time in the 1990s when shares of Microsoft stock seemed to double every couple of years. 1996: college for the kids. 1998: a place on Whidbey. 1999: early retirement.

Times have changed.


2. A Dozen Stocks For '07

Millen also thinks $36 billion in planned share buybacks will help the stock.


3. Commentary: Microsoft needs more than just buybacks to lift its shares

Microsoft shares, which have been dormant for the last few years, have been looking up over the last couple months. The Dow industrials component has gained about 20% since hitting a 4-year low of $21.46 on June 13.

To help move things along, Microsoft not only launched a $40 billion stock repurchase program that lasts through 2011, the company also said its previously announced 4-year, $30 billion stock buyback program was completed in just 2 years.


The following is an article from the Seattle P-I, which tends to be favourable to Microsoft. The article has been highly damaging. It claimed that Microsoft had lost over half of its cash pile in just 2 years. This happened quietly.

Software Notebook: Microsoft's cash pile isn't what it used to be

But Microsoft has taken a series of steps to reduce its cash balance. Specifically, by Microsoft's count, the company has paid out nearly $100 billion through dividends and repurchasing its own stock in the past five years.


That's just what the stock (MSFT) does not tell the complete story.

Adding Insult to Injury -- Microsoft Vice President Resorts to Crime



Robert Bach really dropped the bomb when he resorted to inside-trading. He did this just before a technical and financial disaster was announced (the persistent denial had already lost consumer trust). Here are some articles about this:

1. Microsoft exec dumped stock prior to Red Ring announcement

To make matters more murky, the sales were not registered with the Securities and Exchange Commission within the mandatory two days of the transaction, a result of an alleged "administrative error." Microsoft has since remedied the issue by following the "procedures required of late-filers."


2. Microsoft's Bach sold more stock before Xbox news

Microsoft Corp. executive Robbie Bach sold $3 million more in company stock during the period leading up to an announcement about a costly flaw in its Xbox video game console than previously reported, according to a filing Monday with the Securities and Exchange Commission.


3. Insider Trading Hasn't Affect Microsoft Stock - Yet

MarketWatch.com reports that Robbie Bach, president of Microsoft's Entertainment and Devices division, sold $6.2 million of Microsoft stock just prior to announcing that Microsoft was going to have to extend XBox 360 warranties to three years because of extensive failures. The filings note that this was not part of any scheduled diversification or selling program; this was a conscious, unscheduled sale by the guy in charge of releasing news that could affect the value of Microsoft stock.

[...]

Insider trading is a very serious violation of the law; just ask Martha Stewart, who served five months in prison for avoiding losses of $43,000 through trades that just had suspicious timing (no insider trading was actually proven). This is $6.3 million that went straight into Robbie Bach's pocket.


Under normal circumstance, this guy would be investigated, maybe even jailed. Then again, don't we already know that Microsoft is virtually above the law, lacking supervision of any kind?

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