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Finally (!) Coughs Up the Truth, Almost Four
Years after Burying It
Fortune’s Turn About
“Do you want to believe in the IBM miracle? Then don't look too closely at the numbers,” says Fortune’s “Hocus-Pocus: How IBM Grew 27% a Year”
PHOENIX, June 15 – At a first glance, this may seem like another Annex Bulletin about IBM. It isn’t (although IBM does figure in it). It is a story about one of the nation’s biggest business magazines. And, as you’re about to find out, also one of America’s biggest media “PR fluff” rags.
About four years ago, the Fortune magazine cowardly spiked a part of the story in which this writer warned Fortune reporters in two extensive interviews about the devious schemes of one “Louis XIX of Armonk,” a.k.a. Louis Gerstner, IBM’s new “Last Emperor.”
Our warnings about Gerstner’s “Le Big Bleu” trying to create an illusion of prosperity by means of financial engineering, rather than by growing its business, were repeated in a live interview on CNN, and in a host of the national and global print media reports (e.g., Wall Street Journal, Newsweek, New York Times, The Australian, etc. - see Appendix C). But not by the Fortune magazine. Until now, that is.
Because the magazine has little to lose by discovering the virtues of being honest and truthful after IBM had already pulled its advertising and cut off its relations with the Fortune staff (see APPENDIX A).
But such Fortune’s hypocrisy is no excuse for its apparent plagiarism. Its June 26 story, “Hocus-Pocus: How IBM Grew 27% a Year,” reads as if it were a review of the past Annex Bulletins - without any attribution! Consider the following few examples…
FORTUNE: “The company's (IBM’s) bag of
accounting tricks may be all but bottomless, but it won't satisfy the
crowd forever. Eventually investors will get tired of the illusion of
growth and demand the real thing… Indeed, it is rather amazing that
investors have been willing to suspend their disbelief as long as they
have. Doubts about IBM's earnings quality have been raised for years,
but little criticism has made its way into Wall Street's mainstream
discussion of the company... But that doesn't quite mean that Gerstner
can wow the crowd indefinitely by pulling earnings rabbits out of his
hat.” (Fortune, 6/26/2000)
ANNEX: “Smart money left the IBM stock a long time
ago. Smarter money never
got into it. Yet, those
with large sums of money on the line are holding on to IBM, waiting and
hoping for Lou Gerstner’s final miracle. It won’t happen.
Gerstner’s black hat is clean out of rabbits.” (Annex
Bulletin 2000-12, 4/20/2000)
FORTUNE: “All the dense accounting cannot
conceal one salient fact about IBM: Unlike most other tech darlings, IBM
does not have growing revenues. Its top line--the hardest number to
manipulate--has risen just 5% annually since 1995. In fact,
year-over-year revenue growth has slowed for each of the past three
quarters; in the first quarter of 2000, sales actually fell 5%.”
ANNEX: “Ever since May 1994, the name of the game
and the IBM leaders’ main challenge had been generating new growth.
Ever since 1994, the computer industry was practically bursting
at the seams, driven by an explosive growth of the Internet and related
And how have the IBM leaders met such a
challenge under more than favorable economic and IT market conditions?
Well, you be the judge. IBM
revenues grew at a compound annual growth rate of 6% between 1994 and
1999, half of the company’s growth rate for the prior 82 years!”
(Annex Bulletin 2000-15, 6/01/2000).
FORTUNE: “One way Big Blue has kept the fabulous EPS growth going has been by buying back shares of its own stock. Since 1995, IBM has spent a stunning $34.1 billion to shrink shares outstanding. "Share buybacks are IBM's principal business line," quips Jim Grant, editor of Grant's Interest Rate Observer and one of IBM's most vociferous critics. Indeed: $34.1 billion is more than IBM reported in net income ($31.3 billion) over the same period.” (Fortune, 6/26/2000)
that all of IBM's second quarter earnings growth came from such
non-computer-related factors, the "financial engineering"
deserves to be treated as IBM's new "line of business." (Annex
Bulletin 97-35, 7/21/97)
“Since July 1996, roughly the time IBM
went on a stock buyback binge, squandering about $34 billion dollars on
it without creating a single product or a job, the IBM stock
outperformed the record bullish Dow Jones Industrial average, of which
the Big Blue is a part, by 3.5 times!
Game, set and match! For the Wall Street Lunatics over the Main
Street Smart Money.” (Annex Bulletin 2000-12, 4/20/2000)
And when the Fortune story did venture into offering some of its own opinions, their stupidity was staggering. Consider the following comment:
FORTUNE: “There is, of course, nothing inherently wrong with share buybacks. They can be a great way to increase value for shareholders. After all, if a company merely holds earnings constant while reducing the number of shares outstanding, it automatically increases earnings per share.” (Fortune, 6/26/2000)
There is “nothing inherently wrong” with squandering over $34 billion? Furthermore, arguing that flat earnings and reduced number of shares outstanding increases value to the shareholders ought to be enough to have any college student fail his Economics 101 class. Yet here’s one of the nation’s supposedly preeminent business magazines offering such moronic “analysis” to the millions of investing public! If any investor swallows this Fortune line without choking on it, it will only show us the large extent to which the New World Order has dumbed down the nation.
FORTUNE: “IBM's bottom line also gets a helping hand from yet another source that has nothing to do with its core business: its pension plan… In 1999 alone, IBM booked $762 million in pension income, $266 million more than in 1998, and around 7% of its total pretax profit. If, God forbid, the stock market should slow down and those pension fund gains dry up, IBM could find it that much more challenging to maintain the pace of its earnings-per-share growth.”
Even in this rare example of a case that could not be traced to one of the Annex Bulletins, Fortune wasn’t entirely clear of possible plagiarism. On June 4, the New York Times carried a story in its business pages that made exactly the same argument as above. Yet, Fortune did not give the Times any credit for its analytical scoop, anymore than it gave Annex one for our original analyses and disclosures first published years ago.
And there were parts of IBM’s “financial engineering,” “accounting magic,” “cooking the books,” etc. that the Fortune story didn’t mention at all. Such as the insider stock sales (see “Gerstner: Best Years Are Behind Us”). Instead, even in its newfound criticism of IBM’s deceptive reporting and accounting practices, Fortune put on the kid gloves…
FORTUNE: “The practices that IBM is criticized for fall within accounting guidelines and certainly aren't unique to Big Blue. Nowadays, almost every company manages its earnings to please Wall Street, and less-than-transparent financial reporting is the norm.” (Fortune, 6/26/2000)
Not quite. Not every company monkeys around with taxes, for example, as IBM did, some say illegally (see below) to boost its earnings.
ANNEX: “Have you heard anywhere that there has been a major tax reduction in the U.S. in the last two years? Or anywhere else in the industrial world?
We certainly haven't. Yet you'd be led to such a conclusion if you looked at IBM's financial statements. Three years ago (in 1994), IBM's tax rate was 41.4%. Two years ago (in 1995), IBM's tax rate was 46.5%. In the second quarter of 1997, it was 33.7%. That's almost a 13% drop in two years!!
the IBM shareholders' vantage point, the 13 points which this tax rate
reduction shaved off IBM's costs and expenses in two years was bigger
than the pretax margins of either of its hardware or services businesses
(as you saw earlier)!” (Annex Bulletin 97-35, 7/21/97)
Well, make that more than 16 points by the
end of 1998. Should the tax
collectors in the countries shortchanged by IBM out of their fair share
of Armonk's corporate taxes ever wake up to this "fudge
factory" scam/scheme - take your pick, you may see more government
bean counters with green shades crawling up and down IBM's back, lifting
rugs, and sweeping out all the dirt from its executive suites.
And out of its financial statements.
One of our European sources says that what
IBM appears to have done with its overseas business, especially in
Europe, is to take the prime (contract) offshore, and subcontract the
real work back to the national companies on a cost-plus basis.
That way, profit is taken offshore (where taxes are low or zero),
the various national companies break even, and consequently pay little
or no corporate taxes.
Nor is this necessarily only a customer
financing phenomenon. "Look
at all those contracts won by IBM Global Services," our source
said. "Which legal entity is that?"
Whichever one Armonk wants it to be, we
suppose. A neat scheme.
If it is legal. But if so, we wonder why other multinational
companies - IBM competitors - haven't latched on to it?
A quick look at six of them, picked randomly in the services,
software and leasing IT industry segments, revealed that their recent
tax rates have been around 37%.
If IBM were to be made to pay back the
difference between its actual tax rates and 37%, it would be facing a
tax liability of over $1 billion as of the end of 1998.
And growing... Plus any penalties, of course, should the tax
courts deem appropriate, should they disagree with Armonk's "fudge
factory" interpretation of the tax laws.” (Annex
Bulletin 99-17, 5/28/99).
There is at least one thing in which Fortune was right about IBM. The Big Blue isn’t the only company that is trying to “cook the books” or create an illusion of prosperity out of thin air. In fact, the entire equities market is involved in “cooking the books” and in creating an illusion out of thin air.
“By ‘cooking the books’ the (New World Order) ‘Team’ created a perception that there wasn’t any inflation, and the perception became a reality,” writes H.L. Quist, a Phoenix-based financial advisor and newsletter publisher in his new book, “Secrets” (see http://www.1stbooks.com ). Quist adds:
“The residential component is weighted
to 39% of the CPI (Consumer Price Index).
If actual real estate sales prices were used, the CPI would
probably be three or four times what it has been the last few years.
Interest rates would have risen.
The bond market would have gone into the toilet, and indexed
Social Security and entitlement payments would have increased the
Rather than using sales prices, which
depict a true economic impact on a family budget, the BOLS (Bureau of
Labor Statistics) uses an index that measures increases in single family
rentals, which provides a number which is insignificant within the CPI.
We are now experiencing double digit
increases in prescription drugs, medical costs and health insurance
premiums, but BOLS says inflation is under 2%.
It’s a sham. An
Quist concludes that the bubble will eventually burst causing worldwide panic. Which, in turn, the globalist elite may use as an excuse to invoke totalitarianism.
“Americans don’t realize they made a deal with the devil and the devil is just about ready to close the hell’s gate,” he warns through the words of the book’s main character.
If Quist is right, it isn’t just the American people that stand to lose their freedom in a new “Godless society” that the globalists are trying to create. European nations have already lost more of their freedoms and sovereignty to the European Union, and stand to lose a lot more if the EU does mutate into a European (con)federation, as some German politicians, for example, are proposing, with Bill Clinton seconding it (see “Toward a Globalist European Empire”).
Seen in that context, IBM’s “cooking of the books” and its other shenanigans under the “Louis XIX” leadership fits the pattern set by other fellow-multinationals.
But there is one fly in the ointment that can ruin all these neat plans laid by mice and men. It is a chance that American people may finally wake up from their decades-long slumber and say “no” to such schemes and charades. And do it perhaps even more forcefully than was the case at the WTO meeting in Seattle last December, or at the IMF conference in Washington this spring. Perhaps even as early as at the November ballot?
In that case, what’s your “Plan B,” the Last Emperor, “Louis XIX?” Hiding in an Armonk cellar? Or emigrating to China? In which case, take the Fortune editors with you, will you? You will both feel right at home there.
Happy bargain hunting!
Media Correspondence Archives, February 8, 1997
Letters to the Fortune Magazine
February 8, 1997
Your IBM/Gerstner story
Hope you've found the information I've already sent you of value.
While traveling for a couple of days after our long telephone
interview, I had been thinking about your request for anecdotes which
would illustrate what kind of an executive Lou Gerstner really is.
Unwittingly, perhaps, your questions have forced me to re-examine
the way my own attitude toward him changed and why - from May 1994, when
I rated him an 'A'; to October 1994, when Gerstner was so elated with my
work and public comments that he, in turn, made some very flattering
remarks about me to my face (yet, in front of witnesses); to April of
1995, when the bubble finally burst with us publishing the enclosed
"Hail to the Whistle-Blower" piece.
So to answer one of your questions - "WHEN did I change my
opinion of Gerstner?"- it was in April 1995, therefore, that I
finally concluded that Gerstner/York and Co. had outlived their
usefulness. They were a
fine "transition management team;" good mechanics.
The fixed the leaks; righted the listing Big Blue ship; trimmed
down the crew; painted over the rusty spots...
But they were largely clueless (and still are) about the real
answers to the "what now?"-question.
Worse, the success of their relatively quick and easy turnaround
had gone to their heads. They
became cocky, vane, arrogant and vindictive to all those who
"pushed back," even to the people who did it only to help
As to my own question - "WHY did I change my opinion of
Gerstner?" - I concluded after that one particular incident in late
January 1995, followed by a series of related bizarre episodes, exploded
in my own mind the myth of Gerstner & Co. being the right people to
guide the IBM ship to discovery of new riches.
So probably the "juiciest" anecdotes I could offer you
about Gerstner are actually my own personal experiences with him.
Stories like the above January 1995 incident are not only
exclusive (even I have not published any until now as I wanted to
protect the careers of other protagonists in these episodes), but they
may blow you away, as they touch indirectly some of the highest
officials in our government and education, not just at IBM.
Still, I am prepared to share these anecdotes with you, but subject
to several conditions:
(1) First, I know that your editors have been known at times to kill
a story which was critical of IBM.
I also know, on the other hand, that they can be as tough as
nails when they want to be, which is why I am writing to you in the
first place. But I have to
know of what mind they are this time.
If I were to share the above information with you, and risk
additional retaliation to myself and/or the other protagonists in these
events, I want to be sure that your editors are prepared to run such a
story, and run it in a prominent place (cover would be nice). So please
get your necessary clearances before replying to me on this issue.
(2) Second, if you reply in the affirmative to the above, I will
share with you excerpts from my diaries, along with some related
correspondence. Even though
I almost always use only initials in my diaries, some of the sources, in
or outside of IBM, could be identified fairly easily because of the
context in which they appear. Even
though I don't mind you being able to figure it out, or even see it
plainly in correspondence copies, I want to have your assurances that no
other names from the diaries, except for Gerstner's or York's (which I
also named in my articles), will be used in your story without my
explicit approval and our mutual agreement.
As one IBM insider put it to me in the spring of 1995, "you've
seen that the Emperor has no clothes.
And he knows it. Now
Let me know how you and your editors wish to proceed.
In the meantime, I am enclosing the "Management
Whitepaper: Hail to the Whistleblower" (Annex Bulletin 95-36,
4/27/95) which was the final "straw that broke the camel's
back" - at least in my case.
Sunday, April 27, 1997
Blue"-FORTUNE (April 14)
To: Betsy Morris/FORTUNE
cc: Fortune editors
As you may have gathered from my various e-mails from around the
world, I have recently completed another literally "around-the
-world-trip." In going through the piles of my backed-up mail, I
came across your subject story (“HE'S
SMART. HE'S NOT NICE. HE'S SAVING BIG BLUE”).
What a piece of marketing FLUFF! How much did IBM pay you for it?
(i.e., Fortune-in advertising revenues, I presume).
You and I know very well, if not the other FORTUNE staff members
whom I am copying on this note, what you and I had spent about two hours
discussing in February, when you first called me about this story.
No mention of it in your story, was there?
You and I know very well, if not the other FORTUNE staff members
whom I am copying on this note, the content of my Feb. 8 e-mail note to
you, with which I enclosed some (what I thought were) interesting
examples of the Gerstner administration failure.
No mention of it in your story, was there?
You and I know very well, if not the other FORTUNE staff members
whom I am copying on this note, that in the same Feb. 8 e-mail note to
you, I offered to give you more "juicy" anecdotes based on my
personal experiences with Gerstner (which had never been published
before), if your editors would print the whole truth and nothing but the
truth. In that Feb. 8-note, I also quoted to you one IBMer who said:
"You've seen that the Emperor has no clothes. And he knows
You never even replied to this note, which was a REPLY WHICH RANG
LOUDER THAN ANY OTHER!
In short, Betsy, once upon a time I had a lot of respect for
FORTUNE'S tough and independent stance (vis-a vis IBM). This was based
on the work of Carol Loomis, Bro Uttal, and Peter Petre in the 1980s.
I am sorry to have to note that FORTUNE of the 1990s seems to have
become another "PR rag." For, I know that this was not the
first time the FORTUNE editors have killed (or neutered) an unflattering
story about IBM.
Maybe I'd better hit the road again... to the countries which at
least do not pretend to have a "free press" (e.g., Russia,
Singapore...). Best regards,
P.S. If you (i.e., the FORTUNE) have the guts to do it (which I
somehow doubt), please feel free to print this letter as a "Letter
to the Editor" in one of you upcoming issues. If I am wrong about
this, the FORTUNE does print my letter, I will not only apologize to
you, but I will buy you a dinner at a place of your choice in NYC or
Ed. (June 15, 2000): The Fortune never did, of course, run this as a
letter to the editor. But
Gerstner reportedly did get so mad at the Fortune three years ago, even
over its watered-down story, that he ordered all IBM advertising pulled
from the magazine (about $6 million annually, according to the book
“IBM Redux,” by Doug Garr), and all Armonk relations broken off with
the Fortune’s editorial staff. And
all that after the Fortune’s editors even allowed IBM to pick the
writer for the April 1997 story (Betsy Morris).
only goes to show us that even when some media prostrates itself before
an “emperor” the way the Fortune did, sometimes stooping that low is
still not low enough. But
now that the public knows how the establishment media kow-tows to the
subjects about which it writes, it should also treat its stories with
the same “objectivity” with which it regards corporate ads.
reaction to the April 1997 Fortune story could also help explain why the
Fortune editors eventually found the “courage” to print the truth
about IBM and Gerstner in the June 26 issue.
But this could still not explain their (mis)treatment of the
Annex Research intellectually property, i.e., the reports and interviews
that we shared with the Fortune reporters, for which we received no
credit in the Fortune articles - then or now.
to be sure, however, we asked the Fortune writer (Bethany McLean) by
e-mail if she were aware of our articles from which she seemed to have
“borrowed” some of her ideas and facts for her story:
Date: Wed, 14 Jun 2000 23:52:43
Subject: Djurdjevic/Annex Research on IBM re. http://www.fortune.com/fortune/2000/06/26/ibm.html
To: Bethany McLean/FORTUNE
Bethany. Are you aware of
my articles from 4-5 years ago on the stuff you’ve just written about
IBM? (There was a fait bit of general media coverage about it,
too, back then). Or the fact that I’ve given two extensive interviews
to two senior Fortune reporters in 1996 and 1997 that never saw the
light of day, as the Fortune editors were too afraid (I was told) to
offend a major advertiser by publishing a bit of truth about
I ought to write a story about your story and the infamously
hypocritical role the Fortune has played, first in the cover-up of the
truth, then in its sudden “revelation” four years later?
Ed.: We’ve received no answer as of the time this report was written.
Par for the course… r
Quote from Fortune
SMART. HE'S NOT NICE. HE'S SAVING BIG BLUE” (Apr. 14, 1997):
Annex Bulletin 94-12, March 25, 1994
Mountain Shook, Mouse
- The long-awaited "vision statement" by the IBM
chairman, Lou Gerstner, turned out to be much ado about nothing.
"The mountain shook, (but only) a mouse was born," an
Eastern European proverb says.
a very long speech, full of typical "IBM speak," the IBM boss
proved not only that he was no visionary, but that he was no "change
either. Instead of taking a
sledgehammer to the "IBM culture," the change of which Gerstner
himself admitted was a prerequisite for success, he seemed to have adopted
it quite well.
"techie" tone of the speech also suggested that it was written
by someone with an engineering and/or manufacturing mentality, not by a
"business architect." The
speech lacked imagination; it lacked inspiration; it lacked even the basic
understanding of the global economic and political trends against which
any multi-national strategy must be plotted.
In short, it was a flat, begrudging response to criticism which IBM
CEO's July comment drew - that "the last thing that IBM needs right
now is a vision statement." r
Annex Bulletin 97-18, April 29, 1997
Far as Chess Goes, Gerstner, Ricciardi Are "Tabula Rasa?"
Gerstner: No Deep Blue
even without being pressed to show his mettle, Gerstner volunteered today
an example of why he is no "Deep
Blue" (the IBM chess computer).
the world chess champion, Gary Kasparov, to the IBM Deep Blue chess computer, the IBM chairman demonstrated that he
didn't have a clue what the game of chess was about.
compared Kasparov's slight (5'6" frame) to that of a BIG (weighing a
tons) IBM computer. He
disparaged Kasparov's "thinking speed" at only two moves/second,
forgetting that Kasparov handily beat IBM's
so-many-hundreds-of-thousands-(of irrelevant)-computations-per-second Deep
Blue, the last time around, in 1996.
chess comments today made his legal protégé, Larry
Ricciardi, seem like a partisan fan, if not a liar.
Ricciardi, described as "Gerstner's old friend and IBM's top
lawyer" in FORTUNE's sugar-coated Apr. 14 (1997) story, "Big
Blue," told this New York-based magazine that, "Lou revels in
complexity, and this is five-dimensional chess."
dimensional chess? Excuse me?
Would Ricciardi care to explain what that is?
Or perhaps would the editors of the "PR rag" which
published Ricciardi's statement care to elaborate about why they printed
such a fluffy nonsense?
we are fairly certain that even the 5'6" chess world champion, Gary
Kasparov, despite his tiny frame and his new-found political ambitions in
Russia, would never dare suggest that he was a "five-dimensional'
all, the Russians, unlike the Ricciardis, the Gerstners, or the FORTUNE
editors of this world, know what the game of chess is about.
It is a two-dimensional game in which a 350-pound, 6'6"
football tackle would have about as much of a chance of beating the tiny
5'6" Russian grandmaster as would hell freezing over.
we have an idea about how to "save IBM" from the "IBM
saviors," like Gerstner. Teach
them to play chess! Maybe by
the time the Gerstners or the Ricciardis of the "New Armonk" get
to beat IBM's Deep Blue, they'll
get to appreciate what kind of business they are in?
how long did you say it takes for hell to freeze over? r
A "change agent," is how the IBM director who led the CEO selection process, Jim Burke, described Lou Gerstner's intended role a year ago introducing the new IBM boss in March 1993.
NOTE: The print edition of this report, of course, contains additional charts and tables not included here.
Can you afford not to know such things if you're a global competitor? To subscribe, just click on , or call us as (602) 824-8111.
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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