JimPinto.com - Connections for Growth & Success™
No. 81 : April 4, 2002


Keeping an eye on technology futures.
Business commentary - no hidden agendas.
New attitudes, no platitudes.

Contents:
  • Tyco's "aggressive accounting" tricks
  • CEO pay is out of control
  • The lure of the lifestyle
  • Superman suits for the soldiers of tomorrow
  • Carver Mead's Telecosm speech
  • eFeedback:
    • Use of offshore design talent is shortsighted
    • Life after Invensys - with a good twist
    • More on Carlin's comments

Tyco's accounting tricks

Tyco, the conglomerate with $36b revenue and $4b profits last year, is now under intense scrutiny. In post-Enron jitters, Tyco's stock dropped 61% (from about $60 to $23, recently about 30) erasing almost $70 billion in market cap in just a few weeks.

In the past decade Tyco has acquired hundreds of businesses - 700 in just the past 3 years. That helped fuel an average revenue growth rate of 24%, which boosted the stock price and transformed CEO Dennis Kozlowski into something of a hero. Even before Enron, analysts questioned whether Tyco's growth was real - or whether the company was padding its numbers by being overly aggressive in its acquisition accounting.

Tyco has consistently denied doing anything to artificially boost earnings. But a recent Fortune article (Apr. 1, 2002) gives several examples of "spring loading" tactics at Raychem, the $1.8b revenue company that was acquired by TYCO for $2.9b in Aug. 99. Fortune suggests that more of this type of thing has been going on regularly.

Raychem employees say that they were asked by Tyco to do such things as accelerate payment of expenses, hold back the posting of payments received until after the acquisition date, and overstate reserves. With the merger near, there was a sudden rush to pay lots of bills quickly. Reserves (for such things as inventory, worker's compensation, medical insurance, pensions) were grossly inflated, supposedly to cover anticipated losses; but too-high reserves are reversed at some point in the future, helping earnings and making the Tyco post-acquisition tactics look good. A former Raychem financial manager insists: "Tyco has systematically used dubious accounting techniques to achieve the results that it presented to Wall Street."

In December 1999, the SEC began an informal probe of Tyco's accounting practices; this was closed 7 months later after Tyco backed away from some of its aggressive moves, though the agency won't comment on why it ended its probe. It is likely that they simply could not prove that Tyco's accounting actions actually violated the law.

Pinto Prognostications
"Aggressive accounting" is indeed widespread and has become a serious issue for most major companies. Off book accounting is not something that was invented by Enron and this type of fiddling of financials is widespread. The big accountants, aided and abetted by large financial institutions, consistently look for tax and legal loopholes and actively market their ability to do just that.

Lots of companies have large hidden liabilities off their books a la Enron. In the post-Enron jitters, Tyco was one of the first to be accused of having large off-balance sheet accounts in connection with its hundreds of acquisitions. Indeed, Tyco was the lead bidder for Invensys' Flow Controls group, until the SEC probe raised questions and they backed off; so Flowserve's bid was accepted.

Growth through acquisition often covers up declining revenues and profits. The ability to integrate and implement quick corrections is vital, and Tyco appeared to have an awesome ability in this area. In retrospect, one wonders how much of that was simply accounting shenanigans.

Lessons learned :

  • Be wary of superstars in staid industries.
  • Read the financial footnotes.
  • Boards & management: recognize that running a company is not just an opportunity for personal enrichment, but a trust on behalf of shareholders, customers, employees and the community at large.

Click FORTUNE - Does TYCO play accounting games?

Click Crony Capitalism

CEO pay is out of control

The out-of-control CEO pay machine has begun churning out dollar amounts so humongous that even hardened professionals grope for words. Executive compensation has become highway robbery - we all know that. But how does this happen? And why can't we stop it? The answers lie in the perverse interaction of CEOs, boards, and consultants, even the government.

While the US economy struggles to find an even keel, the stock market is down and employee layoffs are widespread, CEOs and top executives continue to collect gargantuan pay packages, almost defying comprehension.

If you're interested in reading more about the circus that is executive compensation, be sure and check out this article.

Click Fortune - The Great CEO Pay Heist

The lure of the lifestyle

Have you wondered how those CEOs and "crony capitalists" spend the proceeds of their enormous salaries, exercised stock-options and generous perks? They become lifestyle junkies - hooked on pompous posturing, playing follow-the-leader into an endless hedonistic spiral.

This type of escalation up the ladder of life is not limited just to the filthy-rich. Our society stimulates people into thinking that wealth accumulates and extrapolates endlessly. It's easy to succumb to the lure of the lifestyle.

You might enjoy my new article The lure of the lifestyle which has just been published (April 02) by the popular webzine Spark-online.

Click Pinto - The lure of the lifestyle

Click See the latest issue of Spark Online

Superman suits for the soldiers of tomorrow

Future battlefield scenario:
    Under a hail of gunfire, the soldier drops to the ground and stretches a flap of his battle suit in front of him; with the push of a button it hardens into an instant shield. As he moves, the browns and greens of his camouflage uniform change to shades of gray to match the background. When he is hit, sensors immediately relay information about the injuries and location to field headquarters, where doctors instruct his suit to administer painkillers, apply pressure to the wound, and harden into a cast around his leg. Sensors tell HQ which unit is closest to the wounded man; new orders and the target's position appear on the rescuer's heads-up display. To reach his comrade, the rescuer must cross 20 feet of open ground - which he does with a single leap.
That's the sci-fi scenario the U.S. Army has charged the Massachusetts Institute of Technology to make real. The Army has chosen MIT for a new $50m Institute for Soldier Nanotechnologies, with the goal of creating futuristic battle suits. This research center will develop new materials that industrial partners (including DuPont, Raytheon and two Boston hospitals) will integrate into practical products for future battlefields.

On the same theme, Molecular Mechanisms in Cambridge, MA is developing technology for a "superman suit" - to enable running, jumping and lifting to a nearly superhuman degree. Working with a polymer for artificial muscle, the company has engineered molecules that undergo a fundamental change in structure when a voltage is applied.

The new "muscles" go through an accordion-like deformation, stretching out and becoming highly elongated, then buckling in. This movement mimics that way muscles work, which is why the possibilities are exciting. The material looks nothing like muscle - thin, black ribbon that feels almost like electrical tape - but is claimed to be 100 times stronger than mammalian muscle.

Applications are countless. Instead of having motors with gears and bearings, a blob with wires attached can change shape as desired. While a superman suit might be the long-term goal, more prosaic applications are emerging. Examples: leg socks that massage to prevent abnormal blood clotting after long periods of immobility; cardio-wraparounds for patients with weakened heart muscles; controllable, artificial urinary sphincters.

These materials could cost as little as one dollar per kilogram to mass produce, so there may be consumer applications like toys (moving action figures), or cosmetic and toothpaste dispensers. These products could be on the market in one to two years.

Click The soldier of tomorrow

Click Artificial muscles gain strength

The legend of Carver Mead continues

Carver Mead is a silicon legend, pioneering chip technology in the early days of Intel (employee No. 5). He made many of the Information Age's most significant advances in micro circuitry, including HEMT, VLSI, and neuromorphic electronic systems. At 67, hes part academic superstar (as physics professor, hes a Caltech family jewel), part entrepreneur and part sage (straightest talker in the Valley).

Carver Mead is a seminal thinker whose work has spanned much of the growth of electronics. Mead suggests that advancements in vastly different arenas - biology, for example - will help push semiconductor technology beyond the limit of the single-electron gate.

Mead's new company Foveon (previous JimPinto.com eNews) emerged as a result of his ideas and his connections. A business relationship with National Semiconductor led not only to a strategic investment, but an OK to start Foveon in 1997, together with a brilliant National scientist, Dick Merrill.

Listening to a Carver Mead speech is almost a spiritual experience. You might enjoy almost the same feeling by reading a transcript of his recent talk at George Gilder's Telecosm conference.

Click Carver Mead's Telecosm speech

Click Full speed ahead - Mead sees a future without boundaries

eFeedback

Regarding Jack Welch's comments about the use of offshore design talent, Jonathan Schacher [jonathan_schacher@hotmail.com] a manufacturing controls engineer wrote:
    "As a small owner of GE stock I resent Welch's view of the worth of the American worker. It is clear to me that the only thing people like him are interested in is increasing their own wealth, regardless of the implications it has for our society.

    "Those low-level design jobs mentioned are the foundation. Remove the foundation and the house falls. I wonder if Corporate America recognizes how layoffs, plant closings, utilization of offshore resources including cheap labor and material will ultimately affect society. They seem to forget how to plan beyond the reach of their own bank accounts. In the end, America may be reduced to a third world country begging for financial handouts and low paying engineering and manufacturing jobs from the countries that took our jobs in the first place.

    "Silicon Valley may be on the cutting edge and employment may be good. But I still think that the rest of American manufacturing is being destroyed and what's left will be low paying assembly jobs."

Len Sorrell [foxaus@bigpond.com] writes enthusiastically about his new business, selling Invensys products in Australia:
    "Just like a bad penny I have turned up in the "Land of Automation" once more. However this time the only person who will make me redundant, for the fifth time, will be GOD, my wife, bank manager or myself not necessarily in that order.

    "After I fell through the safety net during a belt-tightening exercise at Foxboro Australia, this left them without sales representation for Field Measurement and Control in the state of Queensland. I did the arithmetic and decided that I would go out on my own. I am now the Official Exclusive Queensland Representative for Foxboro FMC Products, with my own company: FoxAus. My clients of 20 or so years are buying the same brand product, from the same salesman, at the same pricing structure, same supplier, technical backup, etc. The only difference is that they are dealing with FoxAus not Foxboro.

    "I will keep in touch and let you know how my fledgling Automation Company progresses."

Ralph Mackiewicz [remccm@mackiewicz.org] comments on George Carlin's uncharacteristically soft comments:
    "Other than the last paragraph, which is about simple human decency, I don't find George Carlin's ranting particularly insightful or useful. I find his cute little pronunciations a bit amusing but mostly superficial and shortsighted. I think its wrong to assume that just because life isn't perfect that it isn't good. I find his trite comparisons so negative as to be mostly ignorant of the fact of life in the modern western civilization that he lives in.

    "The facts are that we are living longer, healthier, wealthier, and happier lives. Unlike our ancestors and those unfortunate people that are forced to live their lives in abject poverty or tyranny in the "third world", we aren't working 120 hours a week just to produce sufficient food to prevent starvation. Yes, we are working harder than ever. But we are doing this to afford college for our kids, an easy retirement, or a summer home. Hardly equivalent.

    "The same superficial and meaningless civilization that people like Carlin decry enables us to afford the luxury of listening to whiners like him. His pessimism and negativity is sometimes hard for me to correlate with his occasionally outstanding sense of humor. Too bad his thinking isn't as sharp as his wit!"

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