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Cisco Kid' Practicing Corporate Trickery

An unethical financial technique for corporate acquisitions mainly used by companies in the tech industry is undermining the market and making tax scofflaws out of millionaire techies.

By Bill Parish
Feature Story Edited by Chris Petherick

A battle is now being fought that may determine the fate of your retirement account, your stock options, your future financial security and your job—no matter what your occupation.

On the one side are the forces of watered stock led by John Chambers of Cisco Systems and on the other side is the Securities and Exchange Commis sion (SEC). The fight is being waged over an unethical accounting method used to manipulate corporate mergers called "pooling."

Pooling occurs when officials from one company want to purchase another and have more stock certificates printed up to pay for the acquisition. In some in stances, companies have even printed up extra shares to give to the lawyers and investment bankers that handle the transaction.

Pooling and the excessive issuance of stock options may combine to make this scheme the greatest financial fraud in 50 years.

If that all sounds impossible, on June 13, The New York Times confirmed an equally remarkable story reported on March 27 revealing that the average worker making $10 per hour pays more federal income tax than the Microsoft Corporation and Cisco Sys tems.

A good example of how pooling works is the case of Cerent, a small company with 300 employees that had only been in business a few years, which was purchased by Cisco Systems for $7 billion in 1999.

In order to purchase Cerent, Cisco issued so many shares that it watered down its stock considerably.

Moreover, nowhere on Cisco's financial statement is the $7 billion cost noted. If this cost were reflected, Cisco would show substantial losses on its income statement and fewer people would buy the stock.

This explains why Cisco now has 8 billion shares of stock outstanding, including stock options, even though its gross annual revenues are only $20 billion. The market value of the company stock is now almost half a trillion dollars.

Cisco is desperate to sustain this scheme because the day it ends their stock could crumble.

TAKE A DIP IN THE "POOLING"

As of now, most leading technology companies, including Intel and Microsoft, seldom use pooling. Because only smaller companies have used the technique, it has not yet impacted the market.

Pooling, although legal, grossly overstates future net income by excluding the cost of acquisitions and thereby fuels interest in a company's stock price.

For this reason, Cisco buys its research and development in the form of other companies rather than using internal development which could in crease its wage costs and show greater losses.

Cisco boasts that it will acquire 25 companies this year.

Cisco's use of pooling is also crushing smaller competitors and leading to a more stagnant technology sector. As a result, many significant innovations are now occurring outside the United States.

Pooling also causes most other company's stock prices that do not use this technique—those that pay wages to employees who develop new products and services—to decline correspondingly.

As capital in the form of stock dries up, most companies are forced to take excessive cost-cutting measures including job and benefit reductions, in order to compete for interest in their stock in the capital markets. The result is an accelerating destabilization of the stock market and the American economy.

Mergers can be an effective way to improve business prospects and stimulate the economy. Mergers using the pooling method, however, lead to a watering down of the company's stock, significant job reductions, inflation due to a lack of competition and a general undermining of the economy.

RALPH NADER TOO?

Even Ralph Nader, an icon of consumer protection, has been swept into this financial scandal.

Recently Nader disclosed that one-third of his entire investment portfolio is invested in Cisco Systems stock.

In Nader's recent acceptance speech for the Green Party nomination, he noted that in 1983 the average worker paid more income tax than GE. Nader failed to mention any of the companies he invested in.

The SEC is scheduled to outlaw pooling this year. Cisco Systems is leading an aggressive lobbying effort, targeting Phil Gramm (R-Tex.) to pressure Congress to override the SEC.

Now is the time to support the SEC. Contact Gramm and other political leaders and launch this issue to where it should be: the upcoming presidential election.
 

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