The March edition displays Citigroup CEO Sanford Weill on the cover with the headline "Tale of Two Citis." Included inside is a two page expose based upon a Parish & Company report claiming that Citigroup has become a "watered stock." Also included is a photo of Bill Parish playing the Spanish guitar while standing on a rock wall in a business suit overlooking Portland from Washington Park. Excerpts from the story are noted below.
Larry Woods, a leading technology analyst, is quoted as referring to
the Parish & Company report as "way ahead of the curve." Further
information on Bloomberg Markets is available at http://www.bloomberg.com/marketsmagazine/index.html
Title: Is Citi's Math Fuzzy?
Author: Loren Steffy
Bill Parish says there's less to Citigroup's income statement and market value than investors realize. ......
Parish, a self-employed financial adviser in Portland, Oregon contends that Citi's numbers are misleading. He says Citigroup is a "watered stock" because it issued billions of shares during the past three years to fund the acquisitions that created it. The stock-based purchases let Citigroup escape goodwill costs for the buying spree, he contends. Without those costs, Citi's earnings look better than they are, spurring investors to bid up the shares.
Parish, who's carried out a two-and-a half year crusade to change the way some big U.S. companies account for acquisitions and employee stock options, has another beef-with Microsoft Corp. The No. 1 software maker is a "financial pyramid scheme," he says. That's because Microsoft issues options to employees so it doesn't have to pay salaries, and it then gets those same employees to pay taxes so the company escapes the expense, he maintains.
Parish was one of the first analysts to alert small investors to the impact that options accounting was having on corporate earnings, says Larry Woods, who publishes a technology investment newsletter in Stoney Creek, Ontario, Canada. "He was way ahead of the curve," Woods says. "His early work on Microsoft was just dammed good detective work."
Parish has taken on Cisco Systems Inc., the biggest maker of Internet equipment. Cisco has devised "a merger scheme designed to leverage growth in its own share price," Parish says. Cisco piles on acquisitions, and the increase in sales drives its stock price, yet the company bears little actual expense, he says.
Parish's supporters find his accounting arguments compelling because most of his data comes directly from companies' financial statements. His assertions, in many cases, are based on simple math. "Bill has documented his stuff very thoroughly," Woods says.
Using an accounting method called pooling that lets companies meld their books, Citigroup didn't have to account for goodwill, which is the difference between the value of the stock it issued for the acquisitions and the acquired companies' book values.
Without pooling, Citigroup would have had to pay for goodwill, wiping out the $61 billion in real capital it now carries on its books, Parish contends. "This loophole, an accounting illusion, has therefore resulted in the nation's largest bank running on empty with respect to real capital," he says.
Like many companies, Microsoft doesn't consider options an expense in the same way as it counts salaries .........
Parish's conclusion: Microsoft, like many other technology companies, was using optinos to lower expenses and to inflate earnings, presenting a favorable picture that boosted its market value to more than $600 billion in December 1999. The rising value attracted more buying by index funds and pension investors. Hence the so-called pyramid scheme.