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Microsoft and Cisco Systems' Financial Pyramid: A Call to Dismantle

Strategic Insights

— 1 min read

The Parish & Company Portfolio Advisors, a Portland-based firm, has conducted an analysis of recent press releases regarding the accounting for employee stock options at Microsoft and Cisco Systems. The firm's conclusion, based on identifying a financial pyramid in which employees prepay their own wages, is that the Department of Justice case against Microsoft should be dropped. The analysis reveals a significant unrecorded expense, $4.4 billion, or $2.9 billion after tax, for fiscal 1998, which would imply a decline in both stocks of more than 60 percent if accurately reflected on the financial statements.

Key Takeaways:

  • The analysis by Parish & Company reveals a financial pyramid in which employees are prepaying their own wages, with Microsoft's stock option liability reaching $40 billion as of 9/30/98 and Cisco Systems' reaching $15 billion.
  • The unrecorded expense of $4.4 billion, or $2.9 billion after tax, for fiscal 1998, would imply a decline in both stocks of more than 60 percent if accurately reflected on the financial statements.
  • Parish & Company encourages all investors to support the SEC's efforts to improve corporate accounting practices, thereby restoring confidence to the financial markets.
  • The analysis highlights the challenge faced by both Microsoft and Cisco Systems in hiring and retaining employees due to the financial pyramid's impact on stock prices.
  • Even spending half of the available cash on a share repurchase program would not solve the challenge posed by the stock option liability.
  • The economy will be reinvigorated, and a new business cycle will be energized, as employees pursue opportunities with greater potential rewards in newer companies able to more liberally issue stock options.

Statistics:

  • Microsoft's stock option liability as of 9/30/98: $40 billion
  • Cisco Systems' stock option liability as of 9/30/98: $15 billion
  • Unrecorded expense for fiscal 1998: $4.4 billion (Microsoft) / $2.9 billion (after tax)
  • Decline in stock price implication: more than 60 percent
  • No stock buyback by Cisco Systems in fiscal 1998
  • Size of the liability to employees: more than 10 times annual net income for Cisco Systems before adjustments

Sources:

  • Parish & Company Portfolio Advisors: "Official Summary of Recent Press Releases regarding the Accounting for Employee Stock Options at Microsoft and Cisco Systems"
  • Microsoft 10K report (1998): "Earnings Per Share"
  • Cisco Systems 10K report (1998): "Liability for Stock Options"
  • Bill Parish's website: www.billparish.com

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